July 28, 2015
With non-qualified stock options (NSOs), if the stock appreciates beyond your exercise price, you can buy shares at a price below what they’re trading for. This is the same as for the perhaps better-known incentive stock options (ISOs).
The tax treatment of NSOs, however, differs from that of ISOs: NSOs create compensation income — taxed at ordinary-income rates — on the “bargain element” (the difference between the stock’s fair market value and the exercise price) when exercised. This is regardless of whether the stock is held or sold immediately. Also, NSO exercises don’t create an alternative minimum tax (AMT) preference item that can trigger AMT liability.
When you exercise NSOs, you may need to make estimated tax payments or increase withholding to fully cover the tax. Keep in mind that an exercise could trigger or increase exposure to top tax rates, the additional 0.9% Medicare tax and the 3.8% net investment income tax.
Have tax questions about NQSOs or other stock-based compensation? Let us know by contacting us — we’d be happy to answer them.
© 2015 Thomson Reuters/Tax & Accounting
Trackbacks/Pingbacks