Tax Center / Global Tax Guide / Glossary / Discussion / Newsletters / About Us
Register Log in
myRecordsmyToolsmyClients
   NQSOs   
Basics   
Taxes   
Taxes Advanced   

Annotated diagram of Schedule DTax errors can be costly! Don't draw unwanted attention from the IRS. Our Tax Center explains and illustrates the tax rules for sales of company stock, W-2s, withholding, estimated taxes, AMT, and more.


NQSOs: Taxes


Test Your Knowledge Test your knowledge with our Stock Options quiz.

Listen to our podcast on the basics of stock options.

Articles (Jump to FAQs)

Stock Option Fundamentals (Part 4): NQSO Taxation This is premium content

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.

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.

Return to top of this page


FAQs (Jump to articles)

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

The full spread for a nonqualified stock option 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...

What are capital gains and capital losses? What are the capital gains tax rates?

Capital gain is income that arises from the sale of a capital asset. Gain from the sale of securities held for investment, such as shares acquired from stock compensation...

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

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

Is the exercise spread of NQSOs subject to federal unemployment taxes?

There is a federal tax (called FUTA) to help fund unemployment benefits. FUTA is imposed on...

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

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

Can I deduct the state tax that was withheld from my NQSO exercise? This is premium content

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? This is premium content

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...

What are the federal tax-withholding rates on stock compensation? Is the rate different for amounts above $1 million? This is premium content

Supplemental income, such as stock compensation, is subject to one of two flat rates that are linked to rates in the income tax brackets. The rate that applies to your supplemental income depends on the...

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

Form 8949 and Sch. D diagrams! How are capital gains taxed when I sell my NQSO shares? This is premium content

To compute the appreciation since exercise, you take the sales price after commissions and subtract...

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

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? This is premium content

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...

How soon after an NQSO exercise must the withholding taxes be paid to the IRS? Is the timing different for a cashless exercise? This is premium content

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? This is premium content

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

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

The holding period to determine whether a dividend is qualified and thus taxed at a lower rate starts on...

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

Former employees' transactions, regardless of the reason for termination, 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? This is premium content

Most companies base withholding on your employment status at the time of grant. If you work elsewhere or are retired at exercise or vesting, then...

Are the tax rules, withholding, and tax return reporting for NQSOs different if I am an independent contractor, consultant, or outside director and not an employee? This is premium content

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

For NQSOs or SARs exercised on the last business day of 2014, or for restricted stock that vests on that day, is the income taxable in 2014 or 2015? This is premium content

All exercises with an exercise date in 2014, and all restricted stock with a vesting date in 2014, will be included in 2014 taxes and on your W-2 for 2014, and will count...

Return to top of FAQs