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Stock options tax treatment is important to individuals who have received a stock option grant award from their corporation. Stock options are used as a way to provide incentives for certain employees as well as a way to recruit talent. These programs are a useful employee benefit program. Unlike other types of programs such as tax-qualified retirement plans (i.e. 401(k), tax-sheltered annuities, etc.) they are not given special tax treatment.
Stock Option Awards
Stock option awards are funded using a corporation’s restricted stock. Restricted stock is a form of shares issued by a corporation that have not been registered with the U.S. Securities Exchange Commission (SEC). Because they are unregistered shares, they contain a special red legend that must remain on the certificate until that are sold by registration.
Use of Restricted Stock
Restricted stock must be held for a period of at least 6 months, fully paid before it can be sold to the public. The sales are restricted to no more than 4 times a year or once every 90 days. There is a volume restriction on the number of restricted shares that can be sold. Only the lesser of 1 percent of the company’s outstanding shares of stock or the average the past 4 week trading volume and be sold at any one time.
Incentive Stock vs. Non-qualified Stock Options
Stock options are classified as either part of an incentive stock option program (ISO) or non-qualified stock option (NSO). ISO programs are what are created to provide incentive awards to certain employees of a corporation, based on performance. NSO programs can be offered to anyone of the company’s choosing, including directors and officers.
Tax Treatment
Stock options are not treated as income when the grant award is made to an employee. The vesting of the options begins the clock for the period of time upon which the shares may be sold. This is because technically the employee does not have physical possession of the stock but rather a promise to buy. He promise to buy is set at a predetermined price and when exercised, will usually result in a gain for the employee.
Short-Term v. Long-Term Capital Gains
The gains realized from the exercise of the stock in the option agreement constitute a taxable event. This gain may be a short-term capital gain or a long-term capital gain. Short-term capital gains are taxable to the employee exercising the option at the same rate as short-term capital gains associated with common stock. The tax can be as high 35 percent. This is done to encourage long-term investing. The long-term capital gains tax rate is up to 15 percent. A short-term gain is any profit earned from the sale of a stock that has been held, or owned, for less than 1 year.
Other Information About Stock Options
Stock options provide a way for a corporation to issue shares of its stock and retain the services of certain employees. The programs are designed to provide non-tax qualified benefits to the employee who benefits from being able to purchase the stock at a low price and sell them in time (after a 6-month holding period) at a higher price.
Stock Option Awards
Stock option awards are funded using a corporation’s restricted stock. Restricted stock is a form of shares issued by a corporation that have not been registered with the U.S. Securities Exchange Commission (SEC). Because they are unregistered shares, they contain a special red legend that must remain on the certificate until that are sold by registration.
Use of Restricted Stock
Restricted stock must be held for a period of at least 6 months, fully paid before it can be sold to the public. The sales are restricted to no more than 4 times a year or once every 90 days. There is a volume restriction on the number of restricted shares that can be sold. Only the lesser of 1 percent of the company’s outstanding shares of stock or the average the past 4 week trading volume and be sold at any one time.
Incentive Stock vs. Non-qualified Stock Options
Stock options are classified as either part of an incentive stock option program (ISO) or non-qualified stock option (NSO). ISO programs are what are created to provide incentive awards to certain employees of a corporation, based on performance. NSO programs can be offered to anyone of the company’s choosing, including directors and officers.
Tax Treatment
Stock options are not treated as income when the grant award is made to an employee. The vesting of the options begins the clock for the period of time upon which the shares may be sold. This is because technically the employee does not have physical possession of the stock but rather a promise to buy. He promise to buy is set at a predetermined price and when exercised, will usually result in a gain for the employee.
Short-Term v. Long-Term Capital Gains
The gains realized from the exercise of the stock in the option agreement constitute a taxable event. This gain may be a short-term capital gain or a long-term capital gain. Short-term capital gains are taxable to the employee exercising the option at the same rate as short-term capital gains associated with common stock. The tax can be as high 35 percent. This is done to encourage long-term investing. The long-term capital gains tax rate is up to 15 percent. A short-term gain is any profit earned from the sale of a stock that has been held, or owned, for less than 1 year.
Other Information About Stock Options
Stock options provide a way for a corporation to issue shares of its stock and retain the services of certain employees. The programs are designed to provide non-tax qualified benefits to the employee who benefits from being able to purchase the stock at a low price and sell them in time (after a 6-month holding period) at a higher price.
