Incentive Stock Options and Tax Implication

Incentive stock options grant you the right to purchase a certain number of shares of stock at an established price

There are two types of stock options

1. Statutory stock options
   • incentive stock options (ISOs) – special, more favorable tax treatment when all the rules and holding periods are met because taxable transaction occurs by selling the stocks with a potential capital gain tax rate.
   • employee stock purchase plan
2. Nonstatutory
   • nonqualified stock options (NQSOs) – report the price break as taxable compensation in the year of exercising the options at regular tax rate.

ISO – four possible categories

Note:

1. No AMT adjustment if the option was exercised and sold in the same year.
2. Ordinary gain should be reported in W-2.
3. The ordinary gain in example 2 is limited at $1,000 because the stock price was lower on the day of sale.
4. The actual gain = ordinary gain + capital gain

Conclusion:

• Grant date to sell date to determine “Ordinary Income”
• Exercise date to sell date to determine “ST or LT Capital Income”