Is exercising stock options a taxable event

Non-Qualified Stock Options - TurboTax Tax Tips & Videos


is exercising stock options a taxable event

Jun 14,  · Exercising your non-qualified stock options is what creates a taxable event. But because you control when you exercise your options, you can control your income tax by deciding when and how many shares to exercise. You also control how well you plan for that taxable event when you create it by Daniel Zajac, CFP®, AIF®, CLU®. Jul 05,  · Exercising and holding incentive stock options is one thing that can increase your tentative minimum tax calculation. In the calendar year you exercise incentive stock options, the spread between the exercise price and the fair market value at exercise (multiplied the amount of options exercised), is included in your income for calculating your Author: Daniel Zajac, CFP®, AIF®, CLU®. Aug 01,  · Statutory Stock Options. You have taxable income or deductible loss when you sell the stock you bought by exercising the option. You generally treat this amount as a capital gain or loss. However, if you don't meet special holding period requirements, you'll have to treat income from the sale as ordinary income.

How Stock Options Are Taxed & Reported

Workers who are fortunate enough to get stock options face some complex tax issues. Get the answers you need here. Dan Caplinger TMFGalagan Jun 9, at AM Some employees earn stock options as part of their compensation packages at work, giving them the right to purchase shares of stock at a fixed price in the future.

If the stock gains in value over time, employees can exercise their stock options, sell the shares, and receive a gain, is exercising stock options a taxable event. Yet there are big implications for your taxes from exercising employee stock options, and it's important to understand all the intricacies involved, is exercising stock options a taxable event.

In particular, once you know which type of options you have, you is exercising stock options a taxable event calculate your best strategy for exercising those is exercising stock options a taxable event and reaping the rewards of your successful work.

Two types of stock options Employees can receive one of two types of stock options. Incentive stock options, or ISOs for short, are available only to employees of a company. Nonqualified stock options, or NQSOs, can be given to anyone, including outside consultants and corporate board directors, as well as workers.

With incentive stock options, exercising the option doesn't create a taxable event for ordinary income tax purposes as long as you hold onto the shares that you receive upon exercise. Later on, you'll pay capital gains tax on any gain when you sell, but as long as you hold the shares for longer than a year after exercising the option, the gain will be eligible for lower long-term capital gains rates.

By contrast, NQSOs create two separate taxable events. First, when is exercising stock options a taxable event exercise the option, you'll be treated as having received taxable compensation equal to the difference between the current market value of the shares you receive and the amount that you have to pay under the option contract.

Later, when you sell the shares, any difference between the value of the shares when sold compared to the market value of the shares when you exercised the option is treated as a capital gain or loss.

Image source: Getty Images. A simple example A basic example shows how this works in practice. You then decide to sell, is exercising stock options a taxable event. Where things get more complicated You can see from the example above that sometimes it can make more sense with NQSOs to exercise sooner rather than later. Any gain before exercise is subject to ordinary income tax, but gain after exercise gets taxed at potentially lower capital gains rates.

But the downside from early exercise is that you have to pay the exercise price right away, rather than keeping it invested elsewhere. That's where the calculator below can be helpful. By running through various scenarios with NQSOs, you can decide whether exercising early makes more sense than simply waiting until closer to the expiration date of the options to exercise.

As with any tool, it is only as accurate as the assumptions it makes and the data it has, and should not be relied on as a substitute for a financial advisor or a tax professional. Be very careful Finally, keep in mind that the tax issues with stock options can be extremely complex. For example, with incentive stock options, there are implications that involve the alternative minimum tax.

If you're subject to that tax, then ISOs can have tax impacts. Moreover, AMT treatment can have disastrous consequences if the stock goes through a cycle of big gains and subsequent declines in the share price. Receiving stock options is a great employee benefit, but it also requires you to be thoughtful about what to do with them.

By using the resources at your disposal, you can make a better decision with your stock options, and maximize their value while keeping taxes as low as possible. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.

With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.


Should I Exercise My Employee Stock Options? | The Motley Fool


is exercising stock options a taxable event


Jul 17,  · Exercising rights or options The date you exercise the rights or options to acquire shares or units is the acquisition date for the shares or units. If you exercise the rights or options on or after 20 September , some special rules apply for working out the cost base and reduced cost base of the shares or units you acquire. May 21,  · Tax rules for nonstatutory stock options. For this type of stock option, there are three events, each with their own tax results: the grant of the option, the exercise of the option and the sale of stock acquired through the exercise of the option. Exercising a stock option means purchasing the shares of stock per the stock option agreement. The benefit of the option to the option holder comes when the grant price is lower than the market value of the stock at the time the option is exercised.