Are Employee Stock Options a Taxable Benefit?

Employee stock options are not a taxable benefit until they are exercised or sold. Employee stock options are first granted but they are not exercised until you actually purchase the stock.

Types of Stock Options

Employers grant two types of employee stock options: nonqualifying and incentive stock options (ISO).

Tax Difference

Nonqualifying are taxed on the difference between the grant price and market price at the time of purchase plus any gains earned from then until the stock is sold. ISO are taxed on the gains only at the time of sale.

Capital Gains

Capital gains come in the form of short term and long term. Short-term gains are for profits from the sale of stocks in less than two years from the time of purchase. The tax rate is the same as your normal tax rate. Long-term capital gains are taxed at a maximum rate of 15 percent.

Losses

With nonqualifying employee stock options, you can offset any losses upon the sale of your stock against the gain you earned from the purchase of the stock at the grant price, which is typically lower than the market price.

Other Options

If you are concerned that exercising your employee stock options will bump you up to a higher tax bracket, consider taking part of the option out in cash to offset your tax bill. This is done by selling a portion of your stock immediately upon purchase at the higher stock market rate.

References

• IRS: Stock Options
• CNN Money: Types of Options