Employee stock options tax treatment and tax issues


Employers offer a variety of different forms of stock incentive compensation. An understanding of the relevant tax rules is essential in designing incentive plans that meet the needs of both employer and employee. This article will consider the most common type of incentive plan — employee stock options.

Employee stock options are popular because they meet a number of business objectives. In particular, they help employers to recruit, retain and motivate employees, without impacting cash flow. Most of the tax rules governing employee stock options are found in section 7 of the Income Tax Act. A stock option is defined as an agreement to sell or issue shares. It is important to note that section 7 only applies to stock options issued to employees. Therefore, these rules do not apply to option issued to contractors or other non-employees.

Corporate employee stock options tax treatment and tax issues and officers are considered to be employees for the purposes of these rules. There are two important exceptions to the above rules. The capital gain would be unchanged. However, there are several others. In future articles, we will consider other stock incentive plans that may be of interest. It is worthwhile to have a discussion with a tax lawyer on any transaction or life event that may involve a significant amount of tax.

By being proactive, you can enjoy the employee stock options tax treatment and tax issues savings that you are entitled to. Note that the foregoing is for general discussion purposes only and should not be construed as legal employee stock options tax treatment and tax issues to any one person or company.

If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice. By Matthew Clark September 17 The following is a summary of the basic tax rules regarding employee stock options: Option issued to employee on Jan. Value of Employerco shares at Jan. Employee is not taxed on grant of option, despite option being in the money. Employee exercises option on Jan 1, Employee stock options are the most popular form of employee stock incentive.

Invitation for Discussion It is worthwhile to have a discussion with a tax lawyer on any transaction or life event that may involve a significant amount of tax.

If you receive an option to buy stock as payment for your services, you may have income when you receive the option, when you exercise the option, or when you dispose of the option or stock received when you exercise the option. There are two types of stock options:. Refer to PublicationTaxable and Nontaxable Incomefor assistance in determining whether you've been granted a statutory or a nonstatutory stock option.

If your employer grants employee stock options tax treatment and tax issues a statutory stock option, you generally don't include any amount in your gross income when you receive or exercise the option. However, you may be subject to alternative minimum tax in the year you exercise an ISO.

For more information, refer to the Form Instructions. 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.

Add these amounts, which are treated as wages, to the basis of the stock in determining the gain or loss on the stock's disposition. Refer to Publication for specific details on the type of stock option, as well as rules for when income is reported and how income is reported for income employee stock options tax treatment and tax issues purposes.

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. Employee Stock Purchase Plan - 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 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 your employer grants you 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. Readily Determined Fair Market Value - If an option is actively traded on an established market, you can readily determine the fair market value of the option. Refer to Publication for other circumstances under which you can readily determine the fair market value of an option and the rules to determine when you should report income for an option with a readily determinable fair market value.

Not Readily Determined Fair Market Value - Most nonstatutory options don't have a readily determinable fair market value. For nonstatutory options without a readily determinable fair market value, there's no taxable event when the option is granted but you must include in income the fair employee stock options tax treatment and tax issues value of the stock received on exercise, less employee stock options tax treatment and tax issues amount paid, when you exercise the option.

You have taxable income or deductible loss when you sell the stock you received by exercising the option. For specific information and reporting requirements, refer to Publication For you and your family.

Individuals abroad and more. EINs and other information. Get Your Tax Record. Bank Account Direct Pay. Debit or Credit Card. Payment Plan Installment Agreement. Standard mileage and other information. Schedule A Form Application for Automatic Extension of Time. Employer's Quarterly Federal Tax Return.

Employee's Withholding Allowance Certificate. Request for Transcript of Tax Return. Popular For Tax Pros. Apply for Power of Attorney. Apply for an ITIN. Home Tax Topics Topic No. Topic Number - Stock Options If you receive an option to buy stock as payment for your services, you may have income when you receive the option, when you exercise the option, or when you dispose of the option or stock received when you exercise the option.

There are two types of stock options: Options granted under an employee stock purchase plan or an incentive stock option ISO plan are statutory stock options.

Stock options that are granted neither under an employee stock purchase plan nor an ISO plan are nonstatutory stock options. Employee stock options tax treatment and tax issues Stock Options If your employee stock options tax treatment and tax issues grants you a statutory stock option, you generally don't include any amount in your gross income when you receive or exercise the option.

Nonstatutory Stock Options If your employer grants you 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. More Tax Topic Categories. Page Last Reviewed or Updated: