How to Calculate Taxes on Non-Qualified Stock Options
Your company may offer its employees non-qualified stock options as an additional form of compensation. A stock option is the right to buy a specified number of shares of your company's stock at a guaranteed price. As the company's stock price rises, the stock options become more valuable. This gives employees an additional incentive to improve the company's performance. The Internal Revenue Service taxes non-qualified stock options in two stages, resulting in the options being charged both income tax and capital gains tax.
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Instructions
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Receive the non-qualified stock options from your company. Review the option agreement for the option price, the number of shares granted by the option and any restrictions on exercising the option.
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Fulfill any restrictions on the stock options. Your contract may require you to fulfill a performance goal or wait a certain amount of time before you can exercise your options.
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Exercise your stock options and buy the total option shares from your company. If your option contract lets you buy 1,000 shares for 20 dollars, your stock purchase costs $20,000.
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Pay income tax on the difference between the current market value of your shares and the amount you paid your company. The IRS taxes this option benefit at your current income tax rates.
If you bought 1,000 shares at $20 when the market price of a share is $100, your taxable income from the stock option exercise is
($100 x 1,000) - ($20 x 1,000)
= $100,000 - $20,000
= $80,000 -
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Sell your shares on the stock market. The difference in value between your shares at the time of option exercise and at the time of sale is taxed as a capital gain. The gain is taxed as income if you owned the shares for less than one year and at the long-term capital gains rate of 15 percent if you owned the shares for over one year.
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References
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