Taxes on Capital Gains Stock Options
When people lament about how complicated the tax code is, they’re probably thinking of the rules relating to capital gains and stock options. Not all stock options are treated as capital gains, and not all capital gains are taxed the same. It is just as important to determine whether your stock option is statutory or nonstatutory as it is to determine whether the capital gain is long-term or short-term. Once you’ve adequately categorized your stock options and determined whether it earned any capital gains, then you can file taxes to account for your earnings.
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Definition
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Any asset you own and use for investment or personal purposes is a capital asset. When you sell a capital asset, the difference between your basis and what you sold the asset for is known as your capital gain or loss. If you sell an asset for more than the basis, then you have a capital gain. Conversely, if you sell an asset for less than the basis, you have a capital loss. A stock option is a privilege granted that allows a person to buy or sell stock at an agreed-upon price.
Types
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There are two types of stock options: statutory and non-statutory. Options given under an employee stock purchase plan are called incentive stock options, and they are considered statutory. Nonstatutory stock options are not granted by employee stock purchase plans.
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Implications
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If you are given a statutory stock option, an option granted under an employee stock purchase, then you are generally not required to include it as income on your return when you receive it. The income from stock options is, however, taxable (and the loss deductible) when you sell or exercise your stock options. These gains are taxed at the rate of capital gains. If you are granted a nonstatutory stock option, the amount of income you must include depends on whether the fair market value is readily available. If an option is actively traded on the stock exchange, such as NASDAQ, then the fair market value of the option can be determined.
Filing
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If you held the asset for longer than one year, it is considered a long-term asset, and if you held it for less than a year, it is considered a short-term asset. Use the capital loss worksheet found in the instructions for Internal Revenue Service Schedule D to figure your capital gain or loss amount. Once you’ve completed your Schedule D, attach it to your Form 1040 and mail or electronically submit it to the IRS. The time frame for filing electronic returns is 10 days and the time frame for mailed returns is 6 to 8 weeks.
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