Exercise Backdating

AAA

DEFINITION of 'Exercise Backdating'

A practice where option holders fraudulently claim to have exercised their call options at a specific time in the past, where in reality, the options were exercised much later. Exercise backdating is often performed by executives who wish to illegally reduce the amount of capital gains taxes they have to pay as a result of exercising the options.

INVESTOPEDIA EXPLAINS 'Exercise Backdating'

An executive will save on capital gains tax if he or she sells shares that have been gained from options (which were exercised less than a year ago). The total amount of taxes on any realized profits could be as high as 35%. However, if those option-granted shares were held for over a year, the total amount of taxes paid could be reduced to as low as 15%. Since some executives have options where the total value of underlying securities are worth millions of dollars, so backdating the exercise date would save them tens of thousands of dollars in taxes.

RELATED TERMS
  1. Capital Gain

    1. An increase in the value of a capital asset (investment or ...
  2. Exercise

    To put into effect the right specified in a contract. In options ...
  3. Option

    A financial derivative that represents a contract sold by one ...
  4. Taxes

    An involuntary fee levied on corporations or individuals that ...
  5. Tax Evasion

    An illegal practice where a person, organization or corporation ...
  6. Options Backdating

    The process of granting an option that is dated prior to the ...
Related Articles
  1. The Dangers Of Options Backdating
    Options & Futures

    The Dangers Of Options Backdating

  2. Backdating: Insight Into A Scandal
    Options & Futures

    Backdating: Insight Into A Scandal

  3. What is options backdating?
    Options & Futures

    What is options backdating?

  4. How can unethical executives use options ...
    Options & Futures

    How can unethical executives use options ...

comments powered by Disqus
Hot Definitions
  1. Elasticity

    A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which ...
  2. Tangible Common Equity - TCE

    A measure of a company's capital, which is used to evaluate a financial institution's ability to deal with potential losses. ...
  3. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity date. YTM is considered a long-term bond yield expressed ...
  4. Net Present Value Of Growth Opportunities - NPVGO

    A calculation of the net present value of all future cash flows involved with an additional acquisition, or potential acquisition. ...
  5. Gresham's Law

    A monetary principle stating that "bad money drives out good." In currency valuation, Gresham's Law states that if a new ...
  6. Limit-On-Open Order - LOO

    A type of limit order to buy or sell shares at the market open if the market price meets the limit condition. This type of ...
Trading Center