How are employee stock options taxed?
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The Curious Bag
ANSWERS: 1
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Employee stock options come in two varieties: nonqualifying and incentive (ISO). Non-qualifying stock options are typically taxed at the ordinary tax rate at the time the option is exercised. ISO are taxed as a long-term capital gain at the time the stock is sold, provided it is sold at least two years after the option is granted to the employee and a year after the option is exercised.
Non-qualifying Stock Options
Non-qualifying stock options are taxed at an ordinary tax rate for the difference between the purchase price and the stock market price. When the stocks are sold, the difference between the stock market price at the time of purchase and the price sold is taxed as a capital gain or loss.
ISO Taxes
If ISO stocks are not held at least two years after the option is granted to the employee or at least a year after the option is exercised, the ISO is taxed at the ordinary tax rate.
Long-term Capital Gains
Long-term capital gains are taxed at a rate of no more than 15 percent.
Alternative Minimum Tax
ISO gains may be subject to alternative minimum tax calculations.
Qualifying Stock Options
ISO is also known as a qualifying stock option.
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