At that point, the entire option gain (the initial spread at exercise plus any subsequent appreciation) is taxed at long-term capital gains rates, provided you sell at least two years after the option is granted and at least one year after you exercise. |
|
Nonstatutory stock options are not granted under an employee stock purchase plan or an ISO plan. |
|
If you are granted a statutory stock option, you generally do not include any amount in your gross income when you are granted or exercise the option.
|
|
However, you may be subject to alternative minimum tax in the year you exercise an ISO. |
|
You have taxable income or deductible loss when you sell the stock you received by exercising the option. You generally treat this amount as a capital gain or loss. |
|
However, if you do not meet special holding period requirements, you will have to treat income from the sale as ordinary income. These amounts, which are treated as wages, also are added to the basis of the stock in determining the gain or loss on the stock's disposition.
|
|
After exercising an ISO, you should receive from your employer a Form 3921, Exercise of an Incentive Stock Option Under Section 422(b). This form will report important dates and values needed to determine the correct amount of capital and ordinary income (if applicable) to be reported on your return.
|
|
After your first transfer or sale of stock acquired by exercising an option granted under an employee stock purchase plan, you should receive from your employer a Form 3922, Transfer of Stock Acquired Through an Employee Stock Purchase Plan under Section 423(c). This form will report important dates and values needed to determine the correct amount of capital and ordinary income to be reported on your return.
|
|
If you are granted a nonstatutory stock option, the amount of income to include and the time to include it depends on whether the fair market value of the option can be readily determined. If an option is actively traded on an established market, the fair market value of the option can be readily determined.
|
|
Most nonstatutory options do not have a readily determinable fair market value. For nonstatutory options without a readily determinable fair market value, there is no taxable event when the option is granted but the fair market value of the stock received on exercise, less the amount paid, is included in income when the option is exercised. |
|
You have taxable income or deductible loss when you sell the stock you received by exercising the option. You generally treat this amount as a capital gain or loss. |
|
While this newsletter is focused more on the taxation aspects of the stocks option, it is important to consider counseling from investment experts and tax professionals to make sure you take advantage of all the benefits and avoid all the risks of mishandling your option. |
|
|
|
|
|
|