Stock Options and Investment Taxation

EMPLOYEE STOCK OPTION INCENTIVES

Many companies use stock option incentives to attract valued associates. Non-qualified stock option (NSO) and incentive stock options (ISO) are generally the two classifications of stock options. In order to maximize your money, you need to understand the nature of stock options, their taxation, and how that will impact your overall finances. Below are basics in outlined format.  To keep more money in your pocket, you need to understand more than just the basics.  Call us for consulting at 424-999-8829.

Market Price – Exercise Price = Bargain Element = GainStock Option

NSO
Bargain Element = Compensation taxed as ordinary income
Taxable Event = exercise date
Ordinary Income = sold less than a year from exercise date
Long-term capital gain = sold a year after the exercise date

ISO
ISO is a statutory stock options, which mean you do not include any amount in your gross income when you receive or exercise the option. Depending on your tax filing situation, you may be subjected to alternative minimum tax in the year you exercise an ISO.
Taxable Event = date of sale
Ordinary Income = sold immediately after exercised
Long-term capital gain when the two conditions below are met.
a. Held for 12 months after exercise
b. Sold after two years from grant date

HELPFUL RESOURCES
Form 6251 Instructions: This instruction explains alternative minimum tax. Go to Line 14—Exercise of Incentive Stock Options.
Publication 525 : This instruction explains the different kind of stock options.
Form 3921: This form report important dates and values for Incentive Stock Option.
Form 3922: This form report important dates and values for Employee Stock Purchase Plan.