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. Taxes

    An involuntary fee levied on corporations or individuals that ...
  2. Options Backdating

    The process of granting an option that is dated prior to the ...
  3. Option

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

    An illegal practice where a person, organization or corporation ...
  5. Exercise

    To put into effect the right specified in a contract. In options ...
  6. Capital Gain

    1. An increase in the value of a capital asset (investment or ...
RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. Why would a company issue a rights offering?

    Companies most commonly issue a rights offering to raise additional capital. A company may need extra capital to meet its ... Read Full Answer >>
  4. What is the difference between share purchase rights and options?

    There is a big difference between share purchase rights and options. With share purchase rights, the holder may or may not ... Read Full Answer >>
  5. What is the difference between an option-adjusted spread and a Z-spread in reference ...

    Unlike the Z-spread calculation, the option-adjusted spread takes into account how the embedded option in a bond can change ... Read Full Answer >>
  6. In what ways can a sinking fund affect bond returns?

    The effective yield of a bond sinking fund to an investor should not be considered similar to a bond nonsinking fund. Both ... Read Full Answer >>
Related Articles
  1. Options & Futures

    The Dangers Of Options Backdating

    This form of executive compensation can pose serious risks for investors.
  2. Options & Futures

    Backdating: Insight Into A Scandal

    Any time money is involved, a scandal is sure to follow. Find out how a university study blew the cover off this one.
  3. Investing

    What More Volatility Means For Momentum Stocks

    One byproduct of the recent tick higher in bond yields: a meaningful rise in volatility for both stocks and bonds.
  4. Options & Futures

    How & Why Interest Rates Affect Options

    The Fed is expected to change interest rates soon. We explain how a change in interest rates impacts option valuations.
  5. Economics

    Understanding Money Laundering

    The process of creating the appearance that large amounts of money obtained from serious crimes actually originated from a legitimate source.
  6. Investing Basics

    Understanding Notional Value

    This term is commonly used in the options, futures and currency markets because a very small amount of invested money can control a large position.
  7. Options & Futures

    The Risks Of Writing Covered Calls

    While writing a covered call option is less risky than writing a naked call option, the strategy is not entirely riskfree.
  8. Options & Futures

    How Low Can Oil Prices Go?

    Record low oil prices are a welcome development for consumers, but oil companies are struggling with choosing market share over profitability.
  9. Options & Futures

    SEC-Regulated Options Brokers

    Investopedia provides a List Of SEC-Regulated Options Brokers
  10. Options & Futures

    How To Trade Orange Juice Options

    How do orange juice options work and which factors determine the orange juice valuations? Here's a sneak peak into the world of orange juice options.

You May Also Like

Hot Definitions
  1. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
  2. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  3. Productivity

    An economic measure of output per unit of input. Inputs include labor and capital, while output is typically measured in ...
  4. Variance

    The spread between numbers in a data set, measuring Variance is calculated by taking the differences between each number ...
  5. Terminal Value - TV

    The value of a bond at maturity, or of an asset at a specified, future valuation date, taking into account factors such as ...
  6. Rule Of 70

    A way to estimate the number of years it takes for a certain variable to double. The rule of 70 states that in order to estimate ...
Trading Center