Cashless exercise
Also: cashless exercise, broker-assisted exercise, cashless option exercise
An exercise method in which the broker fronts the strike cost and withholding, then immediately sells enough shares to cover those amounts, delivering the net shares or cash to the employee.
A cashless exercise eliminates the out-of-pocket cost of exercising. The broker simultaneously exercises the options and sells enough shares to cover the strike, employer tax withholding, and commissions. The employee receives either the residual shares or, in a same-day sale, the net cash. Cashless exercise is only available for public-company options, because a tradable market is required.
Example: an engineer holds 10,000 NSOs at a $12 strike on a stock trading at $60. A broker-assisted cashless exercise covers the $120,000 strike and roughly $125,000 of federal, state, and payroll withholding by selling about 4,100 shares at $60. The employee keeps 5,900 shares at a $60 basis or takes the cash equivalent.
Common mistake: using cashless exercise on ISOs when the goal is qualifying disposition treatment. A same-day cashless sale creates a disqualifying disposition, converting the spread to ordinary wage income and eliminating the long-term capital gains benefit. A cashless-for-shares exercise keeps the ISO clock running but still requires separate cash for the AMT.
Cashless exercise matters in IPO windows, blackout-free periods for insiders using 10b5-1 plans, and at departure when no personal cash is available for the strike.