As an employee, we sometimes ponder our life choices. Is our salary enough to sustain the things we need? Or do we want to make something even better for ourselves? In times like these, we think about investing or buying stock options from the company we’re currently working at. These are an employee’s benefits, which enable them to buy their employer’s stock at a discounted price. It allows you to build equity, which could become a fortune in the long run. However, you need to understand the tax implications of stock options first. Let’s know more about these tax implications below.
Statutory Stock Options
Statutory stock options are granted under an employee stock purchase plan or an incentive stock option plan (ISO). In this type of stock option, the gran doesn’t produce any immediate income that’s subject to a regular income tax. At the same time, the exercise of the option to obtain the stock doesn’t produce any income as long as you hold the stock within the year that you acquire it. The income will only show once you later sell the stock acquired by using the option to do so.
Exercising the ISO plan will produce an adjustment for the alternative minimum tax. It’s a shadow tax system that is designed to ensure that you pay at least some tax even though you have regular tax deductions and tax breaks. It’s the difference between the fair market value of the stock over the amount paid for the stock plus the amount paid for the ISO if there are any.
Nonstatutory Stock Options
For the nonstatutory stock option, there are three things events. They also have individual tax results. These are the grant of the option, the exercise of the option, and the sale of stock acquired through the exercise of the option. The receipts of these events are immediately taxable only if their fair market value is readily determined. However, in most cases, there is no readily available value. Therefore, the granting of the options doesn’t result in tax.
Whenever you exercise an option, this will include the income, the fair market value of the stock at any time you acquired it, and less any amount you paid for the stock. It’s ordinary wage income, which is reported on your W2. Therefore, resulting in an increase in your tax basis on the stock. Later on, once you sell your stock, you will report a capital gains or loss difference on your tax basis and the amount you received on sale.