Key Stock Tax Consequences

Jeff Brown

CPA - Senior Tax Manager

Eide Bailly LLP

jbrown@eidebailly.com

Eide Bailly

Topic: Accounting

Employers may grant stock options to their employees. The tax consequences of granting the options depend on whether the options are statutory (ISO) or non-statutory (NSO). There are three key dates - the grant date - when the employee receives the option, the exercise date - when the option is converted to stock, and the sale date - when the employee actually sells the stock. Tax rules for each can be complex and confusing; here are the key tax consequences at each of these dates, assuming that the stock is vested immediately upon exercise. 

Qualified Option (ISO)

Grant Date: At grant there is no income to the employee, and no deduction to the employer.

Exercize Date: There is no ordinary income or deduction, but there is an alternative minimum tax (AMT) adjustment for the spread between Fair Market Value (FMV) and the option price. The AMT impact can be significant and planning is essential.

Sale Date: If the sale date is both two years from the date of grant, and at least one year from the date of exercise, the employee gets long-term capital gain and the employer gets no deduction.  If either of the above time periods are not met, the sale becomes disqualified, resulting in ordinary compensation income in the year of disposition to the extent of the spread between the FMV at the date of exercise and the exercise price paid.

Non-Qualified Option (NSO)

Grant Date: At grant there is no income to the employee, and no deduction to the employer.

Exercise Date:  At exercise there is income to the employee and a deduction to the employer equal to the spread between FMV and the exercise price.

Sale Date: A sale will result in capital gain or loss equal to the difference between the sale price and the FMV at the exercise date.  The holding period of the stock is determined from the date of exercise.