How Are Employee Stock Options Taxed?
Most employer granted stock options are not included as part of ordinary income when they are granted or exercised.
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Granted options
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When your employer grants you a stock option, what they are really doing is offering you the right to buy company stock at the price it is today and you are given a time period to exercise that right.
Exercising and option
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Exercising an option means you are purchasing the option at the incentive price granted by your employer.
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Sale of stock
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Assuming you meet the holding period requirements when you decide to sell your exercised stock options you do not treat it as ordinary income. Instead you report it as a capital gain or deductible loss depending on the difference between what you bought the stock for and what you sold it for.
Holding period
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Per the IRS Publication 525, the holding period is defined as one year between exercising the option or two years from the time the option was granted to you by your employer, whichever is later.
Filing as a capital gain or loss
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If you meet the holding period requirements then you will report the sale of the stock as a capital gain or loss on the IRS Schedule D on your tax return.
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