{"id":5991,"date":"2020-03-05T00:00:00","date_gmt":"2020-03-05T00:00:00","guid":{"rendered":"http:\/\/www-staging.carta.com\/sg\/blog\/stock-options-tax\/"},"modified":"2021-03-05T06:56:29","modified_gmt":"2021-03-05T06:56:29","slug":"stock-options-tax","status":"publish","type":"post","link":"https:\/\/www-staging.carta.com\/sg\/blog\/stock-options-tax\/","title":{"rendered":"How are stock options taxed?"},"content":{"rendered":"\r\n<p><a href=\"https:\/\/www-staging.carta.com\/sg\/blog\/exercising-stock-options\/\">Exercising stock options<\/a> can be a great way to feel personally invested in the company you work at. Even better, if the company is successful, your shares could end up being worth a lot.\u00a0<\/p>\r\n\r\n\r\n\r\n<p>But exercising your options is a big decision that shouldn\u2019t be made lightly\u2014as with other forms of compensation, Uncle Sam wants his cut of your profit (and sometimes your not-yet-realized profit).\u00a0<\/p>\r\n\r\n\r\n\r\n<p>We chatted with Jack Meccia, a federally authorized tax practitioner who\u2019s currently the managing director of tax strategy at <a href=\"https:\/\/allegoriq.com\/\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\" (opens in a new tab)\">Allegoriq<\/a>, to summarize what you need to know and prepare for if you exercised and\/or sold stock options this year, including:<\/p>\r\n\r\n\r\n\r\n<ul>\r\n<li><a href=\"#implications\">Tax implications<\/a><\/li>\r\n<\/ul>\r\n\r\n\r\n\r\n<ul>\r\n<li><a href=\"#documents\">Tax documents<\/a><\/li>\r\n<\/ul>\r\n\r\n\r\n\r\n<ul>\r\n<li><a href=\"#conversations\">Tax conversations<\/a><\/li>\r\n<\/ul>\r\n\r\n\r\n\r\n<p>&nbsp;<\/p>\r\n\r\n\r\n\r\n<h2 id=\"implications\">Tax implications<\/h2>\r\n\r\n\r\n\r\n<p>Before we get into specific scenarios, here\u2019s a quick recap of how <a href=\"https:\/\/www-staging.carta.com\/sg\/blog\/employee-stock-options\/\">stock options<\/a> work:<\/p>\r\n\r\n\r\n\r\n<ul>\r\n<li><a href=\"https:\/\/www.moneycrashers.com\/employee-stock-options-explained\/\" target=\"_blank\" rel=\"noopener noreferrer\">Stock options<\/a> are the opportunity to purchase company shares at a predetermined price, usually called the strike, exercise, or grant price.<\/li>\r\n<li>Your strike price is usually what the shares are worth when you get your grant.<\/li>\r\n<li>Even if the shares become more valuable, you still get to exercise your stock options (purchase shares) at your strike price.<\/li>\r\n<li>The difference between your strike price and the value of the shares when you exercise is called your \u201cspread\u201d or \u201cbargain element.\u201d<\/li>\r\n<li>Depending on when you exercise and sell, you may be taxed different rates on the spread and on any increase in the shares\u2019 value when you sell them.<\/li>\r\n<\/ul>\r\n\r\n\r\n\r\n<p>Reminder: A lot can impact how much you\u2019ll be taxed, so the best way to figure out how much you\u2019ll owe is to talk to a tax advisor.<\/p>\r\n\r\n\r\n\r\n<h3>Incentive stock options (ISOs)<\/h3>\r\n\r\n\r\n\r\n<p>ISO exercises qualify for special tax treatment if you meet certain requirements. How you\u2019re taxed typically depends on when you decide to exercise and sell.\u00a0<\/p>\r\n\r\n\r\n\r\n<h4><strong>You exercise and sell ISOs within the same calendar year<\/strong><\/h4>\r\n\r\n\r\n\r\n<p>In this scenario, you\u2019ll pay ordinary income tax on the difference between your strike price and the price at which you sell.<\/p>\r\n\r\n\r\n\r\n<ul>\r\n<li><strong>Example: <\/strong>You exercise 100 ISOs for $1 each and sell all 100 shares for $5 each in a cashless <a href=\"https:\/\/www-staging.carta.com\/sg\/blog\/tender-offer-faq\/\">tender offer<\/a>. In this situation, you\u2019ll pay ordinary income tax on $400 [100 x ($5 &#8211; $1)].<\/li>\r\n<\/ul>\r\n\r\n\r\n\r\n<h4><strong>You exercise ISOs and don\u2019t sell within the calendar year<\/strong><\/h4>\r\n\r\n\r\n\r\n<p>In general, you usually don\u2019t have to pay taxes until you sell your shares. However, if you exercise ISOs and don\u2019t sell your shares in the same year, you may have to pay the <a href=\"https:\/\/www-staging.carta.com\/sg\/blog\/what-is-alternative-minimum-tax-amt\/\">alternative minimum tax (AMT)<\/a>.\u00a0<\/p>\r\n\r\n\r\n\r\n<div id=\"footable_parent_6155\"\n         class=\" footable_parent ninja_table_wrapper loading_ninja_table wp_table_data_press_parent semantic_ui \">\n                <table data-ninja_table_instance=\"ninja_table_instance_0\" data-footable_id=\"6155\" data-filter-delay=\"1000\" aria-label=\"Special note\"            id=\"footable_6155\"\n           data-unique_identifier=\"ninja_table_unique_id_287385710_6155\"\n           class=\" foo-table ninja_footable foo_table_6155 ninja_table_unique_id_287385710_6155 ui table  nt_type_legacy_table striped vertical_centered  footable-paging-right ninjatable_hide_header_row ninja_table_search_disabled ninja_table_pro\">\n                <colgroup>\n                            <col class=\"ninja_column_0 \">\n                    <\/colgroup>\n        <thead>\n<tr class=\"footable-header\">\n                        <th scope=\"col\"  class=\"ninja_column_0 ninja_clmn_nm_amt \">AMT<\/th><\/tr>\n<\/thead>\n<tbody>\n\n        <tr data-row_id=\"173\" class=\"ninja_table_row_0 nt_row_id_173\">\n            <td><p><b>Special note: <\/b><\/p><br><p><b>Think of AMT as a deposit.<\/b> The government sees that you got to buy ISOs for less than they\u2019re worth and makes you pay taxes on your profit upfront. Ideally, you recover most or all of that deposit as a dollar-for-dollar tax credit before and during the tax year you sell those shares.<\/p><br><p><b>Don\u2019t forget about this credit.<\/b> If you changed tax preparation software, your tax returns might not be keeping a running total of this tax credit. Almost every week, Jack amends a tax return because an AMT credit was missed. If you paid $30,000 of AMT when you exercised ISOs, you\u2019ll want to position yourself to recover that $30,000 when you sell. <\/p><br><p><b>How much is AMT?<\/b> You can typically exercise some amount of ISOs before you start to owe the AMT deposit, which is 26-28% of the difference between the spread at the federal level. Some states also have their own version of AMT. California, for example, has a 7% AMT rate.<\/p><\/td>        <\/tr>\n    <\/tbody><!--ninja_tobody_rendering_done-->\n    <\/table>\n                    <style type=\"text\/css\" id='ninja_table_custom_css_6155'>\n                        #footable_6155  {\n        font-family: inherit;\n        font-size: 14px;\n    }\n\n                <\/style>\n                \n    \n    \n<\/div>\n\r\n\r\n\r\n\r\n<p>&nbsp;<\/p>\r\n\r\n\r\n\r\n<h4><strong>You sell the shares from your ISO exercise the calendar year after exercising them but less than 12 months after purchasing them<\/strong><\/h4>\r\n\r\n\r\n\r\n<p>If you don\u2019t meet the holding period (selling shares before you\u2019ve held them at least one year after exercising and two years after your grant date), it\u2019s called a disqualifying disposition. In this situation, you\u2019ll pay ordinary income tax on your spread and short-term capital gains tax on any profit between your selling price and the value of the shares when you exercised.<\/p>\r\n\r\n\r\n\r\n<ul>\r\n<li><strong>Example: <\/strong>You exercised 100 ISOs for $1 each in April 2019. When you exercised your options, they were worth $5. In March 2020, you sell all of your shares for $10 each. In this situation, you\u2019ll pay ordinary income tax on $400 [100 x ($5 &#8211; $1)] and short-term capital gains tax on $500 [100 x ($10 &#8211; $5)].\u00a0<\/li>\r\n<\/ul>\r\n\r\n\r\n\r\n<h4><strong>You sell the shares from your ISO exercise after holding them for at least one year after exercising and two years after your ISO grant date<\/strong><\/h4>\r\n\r\n\r\n\r\n<p>If you meet the holding period (waiting to sell your shares until at least one year after exercising and two years after your grant date), it\u2019s called a qualifying disposition. This means your transaction qualifies for a more favorable tax treatment. In this situation, you\u2019ll pay the long-term capital gains tax rate on the difference between your strike price and the selling price.<\/p>\r\n\r\n\r\n\r\n<ul>\r\n<li><strong>Example: <\/strong>Once you\u2019ve been at your company for a year, you hit your <a href=\"https:\/\/www-staging.carta.com\/sg\/blog\/what-is-stock-vesting\/\">one year vesting cliff<\/a> and exercise 100 ISOs for $1 each. 15 months after exercising, you sell all of your shares for $10 each. In this situation, you\u2019ll pay long-term capital gains tax on $900 [100 x ($10 &#8211; $1)].<\/li>\r\n<\/ul>\r\n\r\n\r\n\r\n<h3>Nonqualified stock options (NSOs)<\/h3>\r\n\r\n\r\n\r\n<h4><strong>You exercise NSOs<\/strong><\/h4>\r\n\r\n\r\n\r\n<p>If the fair market value of your company\u2019s shares is higher than your strike price and you decide to exercise your NSOs, your company must report the spread as an addition to your wages on your Form W-2 because they\u2019re allowing you to buy shares for less than they\u2019re worth. This means you\u2019ll pay ordinary income tax plus payroll taxes on your spread.<\/p>\r\n\r\n\r\n\r\n<ul>\r\n<li><strong>Example: <\/strong>You exercise 100 NSOs at $1 each when the shares are worth $5 each. In this situation, you\u2019ll pay ordinary income tax plus payroll taxes on $400 [100 x ($5 &#8211; $1)].<\/li>\r\n<\/ul>\r\n\r\n\r\n\r\n<h4><strong>You sell shares less than a year after exercising NSOs<\/strong><\/h4>\r\n\r\n\r\n\r\n<p>If you sell shares less than a year after exercising NSOs, you\u2019ll pay short-term capital gains tax on the difference between the selling price and the value of the shares when you exercised.<\/p>\r\n\r\n\r\n\r\n<ul>\r\n<li><strong>Example: <\/strong>In April 2019, you exercised 100 NSOs at $1 each when the shares were worth $5 each. In March 2020, you sold all of your shares for $10 each. In this situation, you\u2019ll pay short-term capital gains tax on $500 [100 x [$10 &#8211; $5]).<\/li>\r\n<\/ul>\r\n\r\n\r\n\r\n<h4><strong>You sell shares more than a year after exercising NSOs<\/strong><\/h4>\r\n\r\n\r\n\r\n<p>If you sell shares more than a year after exercising NSOs, you\u2019ll pay long-term capital gains tax on the difference between the selling price and the value of the shares when you exercised.<\/p>\r\n\r\n\r\n\r\n<ul>\r\n<li><strong>Example: <\/strong>In April 2019, you exercised 100 NSOs at $1 each when the shares were worth $5 each. In September 2020, you sold all of your shares for $10 each. In this situation, you\u2019ll pay long-term capital gains tax on $500 [100 x [$10 &#8211; $5]).<\/li>\r\n<\/ul>\r\n\r\n\r\n\r\n<div id=\"footable_parent_6156\"\n         class=\" footable_parent ninja_table_wrapper loading_ninja_table wp_table_data_press_parent semantic_ui \">\n                <table data-ninja_table_instance=\"ninja_table_instance_1\" data-footable_id=\"6156\" data-filter-delay=\"1000\" aria-label=\"Special note( Duplicate )\"            id=\"footable_6156\"\n           data-unique_identifier=\"ninja_table_unique_id_1242857539_6156\"\n           class=\" foo-table ninja_footable foo_table_6156 ninja_table_unique_id_1242857539_6156 ui table  nt_type_legacy_table striped vertical_centered  footable-paging-right ninjatable_hide_header_row ninja_table_search_disabled ninja_table_pro\">\n                <colgroup>\n                            <col class=\"ninja_column_0 \">\n                    <\/colgroup>\n        <thead>\n<tr class=\"footable-header\">\n                        <th scope=\"col\"  class=\"ninja_column_0 ninja_clmn_nm_nso_rsu \">NSO\/RSU<\/th><\/tr>\n<\/thead>\n<tbody>\n\n        <tr data-row_id=\"172\" class=\"ninja_table_row_0 nt_row_id_172\">\n            <td><p><b>Special note:<\/b><\/p><br>  <p>When you sell an NSO or an RSU, be sure to double-check the math. Otherwise, you're at risk of being double taxed.<\/p><br>  <p>Let's say you exercise an NSO with a strike price of $1 when the NSO is worth $10. This creates $9 of income (the difference between the value of the share when you exercised and strike price), and $9 gets included in your W-2.<\/p><br>  <p>If you sell the NSO for $15, you have $4 of gain: $15 minus the $1 strike price and $10 value of the shares when you exercised.<\/p><br>  <p>Here's where you need to be careful: The form that reports the sale might not give you credit for the $9 that was already included in your income. Or it may bury that $9 in a footnote at the end of the tax form. If you don't give yourself credit for the $9, you could be taxed on the $9 as income and then taxed a second time on that $10 when you sell the NSO!<\/p><br>  <p>Similarly, RSUs are included as income in your W-2, but the brokerage 1099 might not give you credit for the income already included in your W-2. If so, that indicates you need to make an adjustment on your tax return.<\/p><\/td>        <\/tr>\n    <\/tbody><!--ninja_tobody_rendering_done-->\n    <\/table>\n                    <style type=\"text\/css\" id='ninja_table_custom_css_6155'>\n                        #footable_6155  {\n        font-family: inherit;\n        font-size: 14px;\n    }\n\n                <\/style>\n                                <style type=\"text\/css\" id='ninja_table_custom_css_6156'>\n                        #footable_6156  {\n        font-family: inherit;\n        font-size: 14px;\n    }\n\n                <\/style>\n                \n    \n    \n<\/div>\n\r\n\r\n\r\n\r\n<p>&nbsp;<\/p>\r\n\r\n\r\n\r\n<h2 id=\"documents\">Tax documents<\/h2>\r\n\r\n\r\n\r\n<p>Before filing your taxes, be sure to gather the following documents:<\/p>\r\n\r\n\r\n\r\n<div id=\"footable_parent_6154\"\n         class=\" footable_parent ninja_table_wrapper loading_ninja_table wp_table_data_press_parent semantic_ui \">\n                <table data-ninja_table_instance=\"ninja_table_instance_2\" data-footable_id=\"6154\" data-filter-delay=\"1000\" aria-label=\"Tax documents\"            id=\"footable_6154\"\n           data-unique_identifier=\"ninja_table_unique_id_418448468_6154\"\n           class=\" foo-table ninja_footable foo_table_6154 ninja_table_unique_id_418448468_6154 ui table  nt_type_legacy_table selectable celled hide_horizonal_borders vertical_centered  footable-paging-right ninja_table_search_disabled ninja_table_pro\">\n                <colgroup>\n                            <col class=\"ninja_column_0 \">\n                            <col class=\"ninja_column_1 \">\n                            <col class=\"ninja_column_2 \">\n                    <\/colgroup>\n        <thead>\n<tr class=\"footable-header\">\n                                                        <th scope=\"col\"  class=\"ninja_column_0 ninja_clmn_nm_type_of_option \">Type of option<\/th><th scope=\"col\"  class=\"ninja_column_1 ninja_clmn_nm_if_you_exercised \">If you exercised<\/th><th scope=\"col\"  class=\"ninja_column_2 ninja_clmn_nm_if_you_sold \">If you sold<\/th><\/tr>\n<\/thead>\n<tbody>\n\n        <tr data-row_id=\"174\" class=\"ninja_table_row_0 nt_row_id_174\">\n            <td>ISOs<\/td><td>\u2022 Your employer will issue <b>Form 3921<\/b>, which provides the information you need for tax-reporting purposes<\/td><td>\u2022 Your employer will report the amount on your <b>Form W-2<\/b> <br \/>\n\u2022 <b>Form 1099-B<\/b> reports any capital gains or losses <br \/>\n\u2022 Final 2019 <b>paystub<\/b>*<\/td>        <\/tr>\n            <tr data-row_id=\"175\" class=\"ninja_table_row_1 nt_row_id_175\">\n            <td>NSOs<\/td><td>\u2022 Your employer will report the amount on your <b>Form W-2<\/b> (box 12, code \u201cV\u201d shows income from an exercise of NSOs) <br \/>\u2022 Final 2019 <b>paystub*<\/b><\/td><td><\/td>        <\/tr>\n    <\/tbody><!--ninja_tobody_rendering_done-->\n    <\/table>\n                    <style type=\"text\/css\" id='ninja_table_custom_css_6155'>\n                        #footable_6155  {\n        font-family: inherit;\n        font-size: 14px;\n    }\n\n                <\/style>\n                                <style type=\"text\/css\" id='ninja_table_custom_css_6156'>\n                        #footable_6156  {\n        font-family: inherit;\n        font-size: 14px;\n    }\n\n                <\/style>\n                                <style type=\"text\/css\" id='ninja_table_custom_css_6154'>\n                        #footable_6154  {\n        font-family: inherit;\n        font-size: 14px;\n    }\n\n                <\/style>\n                \n    \n    \n<\/div>\n\r\n\r\n\r\n\r\n<p><br \/><em>*Not mandatory, but it\u2019s a helpful index<\/em><br \/><br \/><\/p>\r\n\r\n\r\n\r\n<p>Also, keep in mind that the following tax forms could be affected if you exercised and\/or sold stock options:<\/p>\r\n\r\n\r\n\r\n<ul>\r\n<li>Form 6251 (if you exercised ISOs)<\/li>\r\n<li>Form 6251 (if you sold ISOs)<\/li>\r\n<li>Schedule D (if you sold ISOs or NSOs)<\/li>\r\n<li>Form 8949 (if you sold ISOs or NSOs)<\/li>\r\n<\/ul>\r\n\r\n\r\n\r\n<p>&nbsp;<\/p>\r\n\r\n\r\n\r\n<h2 id=\"conversations\">Tax conversations<\/h2>\r\n\r\n\r\n\r\n<p>Taxes are complicated enough without taking stock options into account. When you meet with a tax advisor, be sure to cover the following topics:<\/p>\r\n\r\n\r\n\r\n<ul>\r\n<li>What is the tax upside to exercising now versus the financial downside if my shares lose value? Is it worth exercising and selling shares simultaneously even though it\u2019s not the most tax-efficient option?<\/li>\r\n<li>If I have the option to early exercise or make an 83(b) election, should I?<\/li>\r\n<li>When is the best time of the year to exercise my options?<\/li>\r\n<li>What should I do if I don\u2019t have the money to exercise my options? Is option lending worth it?<\/li>\r\n<li>How many ISOs can I exercise before I owe AMT?<\/li>\r\n<li>If I exercise ISOs and owe AMT, how much of that AMT deposit can I expect to recover as a tax credit when I sell the shares?<\/li>\r\n<li>How does moving to a different state impact my tax obligations?<\/li>\r\n<li>I\u2019m thinking of leaving my company\u2014how long do I have to purchase my options? After a certain period, will the options convert to a different type of option or expire altogether?<\/li>\r\n<li>How do I integrate my equity holdings into an estate plan or in trust planning?<\/li>\r\n<\/ul>\r\n\r\n\r\n\r\n<h2>Other resources<\/h2>\r\n\r\n\r\n\r\n<ul>\r\n<li>Holloway: <a href=\"https:\/\/www.holloway.com\/g\/equity-compensation\/sections\/taxes-on-equity-compensation\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\" (opens in a new tab)\">Taxes on equity compensation<\/a><\/li>\r\n<li>Wood LLP: <a href=\"http:\/\/www.woodllp.com\/Publications\/Articles\/pdf\/Tax_Refresher.pdf\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\" (opens in a new tab)\">Tax refresher on options and restricted stock<\/a>\u00a0<\/li>\r\n<li>IRS: <a href=\"https:\/\/www.irs.gov\/taxtopics\/tc427\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\" (opens in a new tab)\">Topic No. 427 Stock Options<\/a><\/li>\r\n<li><a href=\"https:\/\/yearend.com\/\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\" (opens in a new tab)\">YearEnd.com<\/a><\/li>\r\n<\/ul>\r\n\r\n\r\n<hr class=\"wp-block-separator\" \/>\r\n\r\n\r\n<p class=\"has-small-font-size\">DISCLOSURE: This publication contains general information only and eShares, Inc. dba Carta, Inc. (\u201cCarta\u201d) is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services.\u00a0 This publication is not a substitute for such professional advice or services nor should it be used as a basis for any decision or action that may affect your business or interests. Before making any decision or taking any action that may affect your business or interests, you should consult a qualified professional advisor.\u00a0 This communication is not intended as a recommendation, offer or solicitation for the purchase or sale of any security. Carta does not assume any liability for reliance on the information provided herein.<\/p>\r\n","protected":false},"excerpt":{"rendered":"<p>Here&#8217;s what you need to know and prepare for if you exercised and\/or sold stock options this year.<\/p>\n","protected":false},"author":66,"featured_media":5992,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[9,10],"tags":[60,296,84,297,298,62],"acf":[],"_links":{"self":[{"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/posts\/5991"}],"collection":[{"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/users\/66"}],"replies":[{"embeddable":true,"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/comments?post=5991"}],"version-history":[{"count":0,"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/posts\/5991\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/media\/5992"}],"wp:attachment":[{"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/media?parent=5991"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/categories?post=5991"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/tags?post=5991"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}