Stock options ordinary income or capital gains

Get the Most out of Employee Stock Options

 

stock options ordinary income or capital gains

Mar 08,  · Under a § employee stock option plan, you have taxable income or a deductible loss when you sell the stock. Your income or loss is the difference between the amount you paid for the stock (the option price) and the amount you receive when you sell it. You generally treat this amount as capital gain or loss. Jun 20,  · If you’ve held the stock for more than a year, you’ll incur the long-term capital gains tax on the difference between the exercise price and the eventual sale price. Stock Options Basics. Minimize the taxes to maximize the value. If you choose to sell the exercised stocks in the first year the transaction will be reported as a short-term capital gain (or loss). Short-term capital gains that are taxed at ordinary income tax rates. If you hold the shares beyond one year the gains will be reported as long Author: David Rae, CFP, AIF.


Learn About Incentive Stock Options and the Taxes


Incentive stock options, stock options ordinary income or capital gains, or ISOs, may be awarded only to employees of a company or its subsidiaries. This is in contrast to nonstatutory, or nonqualified, employee stock option earnings, which the IRS defines as salary-like compensation. Capital gains tax rates for ISO profits give the employee a significant tax break.

ISO Tax Status Employee stock options granted by your employer give you the opportunity to buy a stated number of shares of company stock at a guaranteed exercise price. Typically the options are good for several years. A waiting period might apply before you can exercise the options. For nonqualified stock options, or NSOs, the bargain element is treated as compensation and reported on your W-2 form, stock options ordinary income or capital gains.

When you exercise incentive stock options, the bargain element can become a long-term capital gain. Then you have to wait at least another full year before selling the shares. No taxes are due in the year that you exercise the options. You report ISO profits and pay taxes in the year the shares are sold. Assuming you follow these rules, the bargain element plus any stock options ordinary income or capital gains that occurs after the options are exercised are long-term capital gains.

This dollar amount is figured using the fair market value of the shares on the date the options are granted. If you exercise the incentive stock options before both holding period requirements have been satisfied, the ISOs also revert to NSO status and lose the capital gains benefit. The bargain element is taxable as ordinary income in the year of exercise. If you hold the shares for any length of time following exercise, they may gain in value.

In this case, the difference between the market price on the date of exercise and the sale price is a capital gain. A post-exercise gain is short term if you sell the shares within a year. If you keep the stock for more than a year, any gain is long term. Video of the Day.

 

Incentive Stock Options - Ordinary Income or Capital Gains?Michael Gray CPA, Stock Option Advisors

 

stock options ordinary income or capital gains

 

ISO Stock Options Compensation Income Vs. Capital Gains. Profits from ISOs can be treated as capital gains for tax purposes if you meet Internal Revenue Service criteria. This is in contrast to nonstatutory, or nonqualified, employee stock option earnings, which the IRS defines as salary-like compensation. Capital gains tax rates for ISO profits give the employee a significant tax break. Jun 20,  · If you’ve held the stock for more than a year, you’ll incur the long-term capital gains tax on the difference between the exercise price and the eventual sale price. If the ISO is sold at a profit, the compensation income is the spread between the stock's fair market value when the option was exercised and the option's strike price. Any profit above compensation income is capital gain.