Tax implications of non qualified stock options

For ISOs, companies must file Form with the IRS to report the fair market value, strike price, date of exercise, and shares transferred to the employee. For NSO options, the exercise is reported to employees on their W If your tech company or startup is looking to offer stock options, you need to be knowledgeable about the reporting and tax obligations both for the company and for employees receiving the incentives, especially those outlined in IRC Sec A. Aprio can help you complete your A valuation, as well as guide you to the proper stock option plan structure and determine how to manage the granting, issuance, and exercises.

Non-qualified stock option

Working with a knowledgeable tax advisor can help you identify the most advantageous alternatives for your company and your employees, while also ensuring you remain in full compliance with all applicable tax rules. For more information about equity incentives and the related steps, like A valuations, contact Ori Epstein.


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Search Aprio. Choosing the Right Type of Stock Option There are two primary types of stock options available to tech companies looking to provide equity incentives: Incentive Stock Options and Non-qualified Stock Options. Your employees do not have to pay income tax on the issuance or the exercise, but rather only when they sell the stock in the future. This additional alternative minimum tax creates an alternative minimum tax basis in the stock, thus reducing the amount of alternative minimum tax to pay on the disposition.

The Tax Ramifications of Nonqualified Stock Options

As long as the stock exercised is held 1 year from the date of exercise, it will qualify for long-term capital gain treatment. However, ISOs carry some strict holding requirements.

Stock must be held for 2 years from the date of the grant and 1 year from the date of exercise. ISOs will lose any favorable tax benefits if employees do not meet these holding period requirements.

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Exercising your non-qualified stock options triggers a tax. It is then subject to all normal income taxes, plus Medicare and Social Security taxes. Any profit counts as a capital gain. Stocks sold within a year are subject to income tax.

Taxation of Employee Stock Options - NQs and ISOs

If you wait at least a year, they are subject to the lower long-term capital gains rate. Incentive stock options, on the other hand, are much more tax-friendly for employees.


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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. The regular income tax applies to earlier sales.