Tax on Purchased Stock Options
Stock options give the holder the right to buy (a call option) or sell (a put option) shares of stock at a specified price on a specified date. As a type of a financial instrument, the Internal Revenue Service taxes stock options as a capital good, which is figured and taxed differently than income. Stock options are different than employee stock options, which cannot be purchased.
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Stock Options
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Stock options are a type of derivative, a financial instrument whose value is derived from something that is not sold along with the instrument. The option is the right to buy or sell shares of stock, but the shares are not sold along with the option. One options contract usually deals with 100 shares. Investors buy and sell options on option exchanges.
Purchasing Stock Options
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The IRS does not tax investors when they purchase stock options, though the purchase price (the tax basis) matters for figuring taxes later. The IRS only levies taxes on investors after they have sold the options or let them expire and have realized a loss or profit on the transaction.
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Capital Gains Tax
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Investors report transactions after they realize a profit or loss on the stock options on Schedule D of the Form 1040. If the investor profited from selling the options, the profit (the sale price minus any transaction costs and the purchase price) is taxed as a capital gain. If the investor held the option for more than 365 days, the IRS charges the 15 percent long-term capital gains tax, whereas options held for less time do not count as income but are taxed at the investor's income tax rate.
Employee Stock Options
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Employee stock options cannot be bought and sold. Companies grant stock options of company stock to employees as a form of compensation; the IRS treats non-qualified stock options as income and incentive options as capital gains. Employees pay tax on options when they use them to purchase company stock.
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