Exercise Backdating


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.

BREAKING DOWN '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.

  1. Taxes

    An involuntary fee levied on corporations or individuals that ...
  2. Option

    A financial derivative that represents a contract sold by one ...
  3. Options Backdating

    The process of granting an option that is dated prior to the ...
  4. Capital Gain

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

    To put into effect the right specified in a contract. In options ...
  6. Tax Evasion

    An illegal practice where a person, organization or corporation ...
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  1. What is options backdating?

    Options backdating occurs when companies grant options to their executives that correspond to a day where there was a significantly ... Read Full Answer >>
  2. How can unethical executives use options backdating to evade taxes?

    The practice of options backdating has landed many companies into the hotseat. The SEC constantly investigates possible instances ... Read Full Answer >>
  3. How do hedge funds use equity options?

    With the growth in the size and number of hedge funds over the past decade, the interest in how these funds go about generating ... Read Full Answer >>
  4. Can mutual funds invest in options and futures?

    Mutual funds invest in not only stocks and fixed-income securities but also options and futures. There exists a separate ... Read Full Answer >>
  5. How does a forward contract differ from a call option?

    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>
  6. What are some high-profile examples of wash trading schemes?

    In 2012, the Royal Bank of Canada (RBC) was accused of a complex wash trading scheme to profit from a Canadian tax provision, ... Read Full Answer >>

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