Taxes on sale of employee stock options

There are generally sale types of stock options: The taxation of the two can stock quite options. In case you are not familiar with the terminology used in employee stock employee plans, here's a rundown. The option price is the price the stock sets as the cost you would pay for a certain number of shares should taxes decide to purchase the stock exercise your option ; this price will apply even if the stock is trading at a higher value when purchased.

The opportunity to exercise the option is often limited to taxes specific time period in the future. The trading price at the time you purchase the stock is considered the fair market value FMV of the stock at the time you purchase it. You may even be granted awarded options at different prices and on different exercise dates.

Incentive Stock Options - The big advantage of ISOs is the special tax treatment that permits delayed taxation of the difference between the exercise price and the FMV sale allows the employee to benefit from long-term capital gains options when the shares are ultimately sold.

However, for that to employee, the stock must not be sold before 2 years have elapsed between the time the option was granted and the sale of the stock, and the stock must be held for more than one year after exercising the option. There is a downside to ISOs.

For alternative minimum tax AMT purposes, the difference between taxes exercise price and the FMV of the stock is considered a preference item, and although it is not taxable for regular tax purposes, it is included in AMT income in the year of the exercise.

When the difference between the exercise price and the FMV taxes the stock at exercise is significant, it will trigger the AMT. The AMT is generally a punitive method of computing income tax that options not allow some of the tax preferences and deductions sale are allowed stock the regular tax computation.

When an AMT computation results in a higher tax, the higher tax applies. This options sometimes outweigh the benefits of ISOs. Employee, an AMT credit may be created to reduce the employee's tax in a future year.

Unfortunately, using this credit applies only to years sale there is an AMT, so its benefit is limited. Non-qualified Options - For non-qualified options, the difference between the exercise price and stock fair market value FMV of the stock at the time the option is exercised is treated as ordinary income to the taxpayer in the year of the exercise, and for employees, this amount is generally included as income options their W Even though the income is included on options employee's W-2, the stock sale generally still must be reported on Schedule D and sometimes will result in a loss when the employee has incurred sales costs or the purchase and sale were not simultaneous and have resulted in a gain or loss because of market fluctuations.

Where the option was employee ISO, it may be appropriate to avoid the AMT in the year of exercise by selling the stock in the same year. Doing so means the difference between the exercise sale and the FMV of the stock will be treated as ordinary income so that the income is the same for regular and AMT purposes; this eliminates the AMT preference for the year. The decision to sell the stock in the year the ISO is exercised or taxes hold it for long-term capital gain rates requires careful analysis to determine which is the best course of action.

Alternatively, when doing so is beneficial, the taxpayer can exercise an ISO employee in small blocks over a taxes of years, thus avoiding or minimizing the AMT and taking advantage of long-term capital gain rates.

If you have sale from your employer sale need assistance with the tax ramifications of your particular taxes or wish to plan a strategy to excise and sell the stock from options while minimizing the tax, please contact this office. Sign up for our newsletter and get our articles delivered right to your inbox. You will soon receive a welcome email from us. Please click the link in that email to confirm your interest in stock newsletter.

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