Employee Stock Options
Federal taxes can be impacted by employee stock options. This guide provides detailed information for both employers and employees.
Overview
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Non-qualified stock options
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FMV at exercise minus option price = W-2 Income at time of exercise
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Basis for later sale: FMV at exercise
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Qualified stock option
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Also known as Incentive Stock Options (ISO)
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Regular tax basis: Option price
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AMT tax basis: FMV at exercise
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AMT Preference in year of exercise: FMV at exercise minus option price
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Qualifications - holding period for CG treatment at sale:
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More than 1 year after the stock option was exercised, and
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More than 2 years after the option was granted.
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Otherwise, treatment similar to non-qualified option
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Related IRS Publications and Forms
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Pub 525 – Taxable and Non-Taxable Income
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Form 3921 - Exercise of an Incentive Stock Option Under Section 422(b)
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Form 3922 - Transfer of Stock Acquired Through an Employee Stock Purchase Plan Under Section 423(c)
Note: As complicated as this subject is, there is no specific IRS publication dealing with the sale of qualified (ISO) and nonqualified options.
This section explores the two types of stock options, non-statutory and incentive stock options (statutory), plus the tax treatment for various transactions involving those two options. In order to provide comparative examples of the various tax treatments, the same set of circumstances (illustrated below) will be used for all examples. Assume no sales costs.
Comparative Example Data: Employer Stock: Sharp, Inc.
| Number of Shares | 1,000 |
| Exercise FMV (per share) | $120.00 |
| Option Price (per share) | $20.00 |
| Bargain Element (per share) | $100.00 |
| Regular W-2 Wages (for year) | $150,000 |
| Filing Status | Single |