Are stock options taxed differently?

Generally, the gains from exercising non-qualified stock options are treated as ordinary income, whereas gains from an incentive stock option can be either treated as ordinary income or can be taxed at a preferential rate, if certain requirements are met.

How are stock options taxed under current tax rules?

Under the current employee stock option rules in the Income Tax Act, employees who exercise stock options must pay tax on the difference between the value of the stock and the exercise price paid. Provided certain conditions are met, the employee can claim an offsetting deduction equal to 50% of the taxable benefit.

Do I need to pay taxes on stock options?

You don’t even have to report them as income when you receive the grant or exercise the option. You will still have to pay tax on the money you make from selling the actual stock units though. The long-term capital gains tax applies to sales made two years after the grant and one year after exercising the option.

How are stock options taxed when you sell?

That’s the $5 stock price minus your $1 strike price: If you sell the stock when the stock price is $10, your theoretical gain is $9 per share—the $10 stock price minus your $1 strike price: The spread (the difference between the stock price when you exercised and your strike price) will be taxed as ordinary income.

What happens when you exercise a stock option?

Exercising your non-qualified stock options triggers a tax. Let’s say you got a grant price of $20 per share, but when you exercise your stock option the stock is valued at $30 per share. That means you’ve made $10 per share.

How are non-qualified stock options taxed as ordinary income?

If eligibility and holding period requirements are met, the bargain element is taxed as a capital gain to the employee. For non-qualified stock options, the bargain element is treated as ordinary income to the employee. However, you have fewer obligations with regard to IRS and SEC compliance and reporting.

What do I need to know about my stock option plan?

When the stock was acquired at a discount under an employee stock option plan, you’ll receive Form 3922—Transfer of Stock Acquired Through an Employee Stock Purchase Plan from your employer or the corporation’s transfer agent . The information on this form helps you determine the amount of gain or loss, and whether it is capital or ordinary income.