This excerpt taken from the VRSN 8-K filed Jan 4, 2007.
We recommend that you consult a tax advisor with respect to the federal, state and local tax consequences of participating in the Options Election, as the related tax consequences to you are dependent on your individual tax situation.
If You Participate in the Options Election. If you are an option holder who chooses to accept this Options Election with respect to outstanding eligible options, you should not be required to recognize income for United States federal income tax purposes at the time of the acceptance and amendment of such options. We believe that the acceptance and amendment of options will be treated as a non-taxable exchange.
Your amended options will be nonstatutory stock options for purposes of United States tax law. Under current law, an option holder generally will not realize taxable income upon the grant of a nonstatutory stock option. However, when an option holder exercises the option, the difference between the exercise price of the option and the fair market value of the shares subject to the option on the date of exercise will be compensation income taxable to the option holder. The Company generally will be entitled to a deduction equal to the amount of compensation income taxable to the option holder if the Company complies with applicable reporting requirements. Upon disposition of the shares, any gain or loss is treated as capital gain or loss. If you were an employee at the time of the grant of the option, any income recognized upon exercise of a nonstatutory stock option generally will constitute wages for which withholding will be required.
If You Do Not Participate in the Options Election. The following is a summary of the material United States federal income tax consequences of declining to participate in the Options Election for those employees subject to United States federal income tax.
Your decision not to accept this Options Election with respect to your eligible options could result in potentially adverse tax consequences to you. Please read this section carefully and talk to your tax advisors regarding your decision regarding participation in this Options Election. Section 409A of the Internal Revenue Code and recently proposed tax regulations under the American Jobs Creation Act of 2004 provide that stock options issued with an exercise price less than the related fair market value of the underlying stock on the date of vesting must have fixed exercise dates to avoid early income recognition and an additional 20% tax. Your eligible options were granted at less than the related fair market value of the underlying stock and you may have income recognition and owe an additional 20% tax as well as be liable for certain interest penalties. None of the eligible options have fixed exercise dates and therefore they would subject the optionees to income recognition before the options are exercised and would subject the optionees to the additional 20% tax. It is not entirely certain how such tax would be calculated, but we think it is likely that the spread (that is, the difference between the value of the shares at the time of vesting and the exercise price of such shares) will be includable as income when the option vests and a 20% tax will be assessed on the spread. Additionally, during each subsequent tax year (until the option is exercised), the increase in value of the underlying stock will be taxed and subject to an additional 20% excise tax.