Tax Center: NQSO Basics

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.

Global Tax Guide To Equity Compensation For International & Cross-Border Employees UPDATED!

The myStockOptions.com Tax Team
The Global Tax Guide explains the taxation of equity awards in 32 countries: stock options, restricted stock, restricted stock units, performance shares, stock appreciation rights, and employee stock purchase plans. The country profiles are regularly reviewed and updated as needed. We do our best to keep the writing lively.

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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Do you have a chart that compares the tax treatment of stock options, restricted stock, RSUs, and ESPPs?

The useful chart below gives the types of taxes, and when they are triggered, for various forms of equity compensation granted in the United States...

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...

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

"Capital gain" is income that arises from the sale of a capital asset. Gain from the sale of shares acquired from option exercise or restricted stock vesting is...

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. However, with stock from equity compensation, your tax basis can be harder to determine. It is...

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

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

My company's stock price has dropped since I exercised my NQSOs. Is there anything I can do to reduce the taxes I owed on the spread at the time of exercise?

No. Since the spread between the exercise and market price for NQSOs is taxed as ordinary income upon exercise, the tax is fixed on that date...

NEW! Can the IRS seize stock options or restricted stock under a tax lien?

The IRS can seize your stock options if it applies a federal tax lien to you for unpaid taxes. After seizing your stock options, the IRS can also...

I have both in-the-money and underwater options. If I exercise them all and immediately sell the stock, can I offset the gains with the losses on the underwater options?

This is wishful thinking, because these are two separate transactions. It does not make sense to...

What happens if I sell the shares for less than the fair market value on the date of exercise of the NQSO?

You have a capital loss for federal income tax purposes...

What happens if I have a capital gain from one sale of company stock and a capital loss from another sale of company stock or another security?

The treatment for tax-loss harvesting is similar to that of owning and selling any two stocks. The income-tax reporting for multiple transactions is...

Are there any stock-option strategies for using my capital-loss carry-forwards?

Tax considerations alone should not drive the choice of what stock you sell. For example, if you are holding appreciated company stock from a nonqualified stock option (NQSO) exercise, you will be taxed on any capital gains when you sell it. The capital-loss carry-forward from last year's unused losses can offset these gains, making it less "taxing" to diversify your holdings...

Both dividends and long-term capital gains are now taxed at the same rate. Can I net my dividends from my company stock against capital loss from the sale of company stock or another security?

No. Under the 2003 tax cut, qualified dividends are taxed at the same rates as long-term capital gains...

If I move to another country to work, will I still have to pay US taxes on option exercises, restricted stock vesting, and stock sales? Can I avoid double taxation?

The United States taxes the worldwide income of US citizens regardless of whether the income arises from activities in the US. In addition, the other country may impose taxes too. But the US has tax treaties with certain nations to help taxpayers avoid double taxation...

What happens if I live in state A when my stock options are granted, state B when I perform some of my services, state C when I exercise the options, and state D when I sell the shares?

Generally, each state you live in determines what income is taxable and when. For administrative ease, many companies...

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