Tax Rates for Stock Options
As a growing part of employee benefit packages, stock options sit on the line between income and investments. As a result, the tax rate you pay depends on whether you have qualified or non-qualified options, as well as when you exercise and sell your stock.
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Non-Qualified Options
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Most employees that receive stock options have non-qualified options. When you exercise (in finance, exercising options means to redeem the options and buy company stock at the discounted price specified in the option), you must pay income taxes on the difference between the price you pay and the market price.
Qualified Options
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Qualified options mostly go to company executives, because they carry a favorable tax rate. When you exercise qualified options, you report the difference between the amount you pay and the market price as a capital gain, and any further profit from selling company stock later also counts as capital gain. Capital gains rates tax investments and property sales (houses, cars, stamp collections) and for most taxpayers is 15 percent.
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Exercising and Holding
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If you exercise your non-qualified stock options and sell the discounted stock for the market price immediately, the money you make is reported and taxed as income. However, if you exercise and do not sell immediately, you still owe income tax on the difference for the year you exercised the options. Any profit you make from selling company stock after holding it for at least a year is taxed as capital gains.
Considerations
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CNN Money reports that the usual practice is to hold off on exercising your options until they are about to expire and then selling them. For many, this is a safe and easy strategy that usually maximizes the options. However, depending on your risk tolerance and your opinion of the company, you may want to hold onto the stock or sell everything as fast as possible.
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