NQSOs: Taxes

Stock Option Fundamentals (Part 4): NQSO Taxation

Marilyn Renninger
You're ready to delve deeper into how and when different taxes apply to NQSOs. You need to consider taxes at exercise and at sale to put together a strategy that maximizes the value of your options.

How The Bush Tax Cuts Still Affect Your Stock Option Planning

Tom Davison
UPDATED! The Bush administration's 2003 tax cuts and later extensions continue to affect tax strategies for NQSOs, ISOs, and restricted stock.

Taxable And Nontaxable Income:
IRS Publication 525

Internal Revenue Service
This IRS publication explains the tax treatment of many kinds of income, including that from NQSOs, ISOs, and restricted stock/RSUs.

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How is the spread at exercise of an NQSO taxed for federal income-tax purposes?

The full spread is included in your gross income for the year of exercise as ordinary income...

When I hold NQSO shares after exercise, what tax applies when I later sell the stock?

Capital gains tax applies on the amount of your gains above...

Is the spread at exercise of a nonqualified stock option subject to Social Security taxes?

Yes. The spread at exercise of an NQSO is "wages" for purposes of...

Is the spread at exercise of a nonqualified stock option subject to federal unemployment taxes?

Yes. There is a federal tax...

Is the spread at exercise of a nonqualified stock option subject to state and local taxes?

Many states, along with some counties and cities, impose...

Can I deduct the state tax that was withheld from my NQSO exercise?

Generally, state and local income taxes are an itemized deduction on your...

What federal tax rates ultimately apply to the exercise of a nonqualified stock option?

Regardless of the amount that is withheld at the time you exercise NQSOs, the final tax is based on the standard tables for ordinary income...

Does the tax-withholding rate for supplemental income differ for amounts less than $1 million and for amounts over $1 million?

Depending on the aggregate amount of supplemental income for the year, a two-tier rate applies. The withholding rate for supplemental wages that exceed $1 million in a calendar year is...

What is "capital gain"? Have recent tax laws changed the rates?

"Capital gain" is income that arises from the sale of a capital asset. Gain from the sale of securities held for investment...

When does my holding period for capital gains begin? At exercise or vesting?

The holding period to determine whether a capital gain is long-term or short-term starts on the...

How is capital gain calculated?

The amount of your capital gain is the difference between your sales price and your tax basis in the stock...

How does my employer calculate the amount of withholding due at the exercise of a nonqualified stock option?

When you sell the stock at exercise, companies usually calculate the taxable spread with your...

How do I pay any required tax-withholding when I exercise an NQSO?

If you do a cash exercise, your employer will require you to make arrangements to pay additional cash to the company to cover the withholding obligation. If...

In a cashless NQSO exercise, how are my taxes withheld and paid to the IRS?

The IRS has set deposit rules companies must follow. With a cashless exercise, the broker essentially sells the shares that underlie the options at the time of exercise. The broker sends the company cash from the sale of your shares that is equal to the amount required for tax...

Will the amount of tax withheld at NQSO exercise cover the amount of tax that I am required to pay when I file my return?

Not necessarily. Employers usually withhold federal income taxes at the rate used for supplemental wages...

Schedule D diagram! How are capital gains taxed when I sell my NQSO stock?

If you hold stock acquired from the exercise of an NQSO for more than one year, the appreciation is...

When does my holding period for the special tax rate on dividends begin? At exercise or vesting?

The holding period to determine whether a dividend is "qualified" and taxed at the lower 15% rate starts on the date after the option is exercised and the stock is held...

I'm no longer an employee, so why is there withholding on my NQSO or SARs exercise?

Former employees' transactions follow the same withholding and reporting requirements that apply to...

I may leave my company to become a consultant, retire, or take another job. Will taxes still be withheld on my NQSOs, SARs, and/or restricted stock as they were when I was an employee? What if I live in another state when I exercise them?

Most companies base withholding on your employment status at the time of grant, even if...

Are the tax rules and withholding for NQSOs different if I am an independent contractor, consultant, or outside director and not an employee?

In some ways they are similar, though different if you were an employee at the time of grant. The tax treatment of NQSOs is...

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