When I hold NQSO shares after exercise, what tax applies when I later sell the stock?
You are taxed on your capital gains, as with any stock you purchase. Capital gains tax applies on the amount of your gains above your tax basis after exercise. Long-term capital gains rates apply when you hold the stock more than one year after exercise.
Example: You receive a grant of NQSOs and exercise them after vesting.
- Your exercise price is $12.
- The market price (used to calculate the spread at exercise) is $18.
- You sell the stock when the price is $26.
- You have $6 per share ($18 – $12) of ordinary income at exercise.
- You sell the shares more than one year later.
- You have $8 ($26 – $18) of capital gains at sale.
- The capital gains are taxed at 15% or 20%, depending on your income.