I sold my company (123) to XYZ for an upfront cash payment, installment payments based upon the attainment of financial forecasts and stock options. I assumed the deal was structured this way 1. to protect XYZ should 123 not be able produce as expected and 2. so that XYZ could meet 123's desired purchase price without having to put up all the funds. The stock options were issued to 123. The cash payment and installment payments were all treated as long term capital gains. The agreement for the stock options stated that it could not exercised until the sale or merger of XYZ (which they anticipated to occur in 3 - 5 years). If XYZ was to be sold, the stock options could be exercised and then immediately sold to XYZ or to the acquiring company. It appears that XYZ is about to be sold. I am getting conflicting information on the tax treatment. XYZ says that I have to treat the proceeds from the sale as income as part of their employee incentive plan. But then indicated is would be short term capital gain as the holding period of the stock will be a matter of days. The options were issued to 123. 123 is not and never was an employee or subcontractor for XYZ. A tax advisor said that it is should be long term capital gains since the options were part of the original purchase agreement between 123 and XYZ and the options should be considered as a final installment payment. Also, given that XYZ was an LLC it probably didn't actually have stock only equity positions. The IRS kept talking about recapitalization. As such the holding period would extend to the date that the option was agreed. I guess whether it can be a recapitalization depends on whether the stock is bought back by XYZ or bought by the acquiring company????? Any assistance will be greatly appreciated.