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Tax Treatment of Stock Options

  Nonstatutory Stock Options Statutory Stock Options (ISO)
At Grant Date

Not subject to tax unless the FMV

of the option is readily determined.

No AMT adjustment is required.

Not subject to tax.

No AMT adjustment required.

At Exercise Date

Substantially vested stock - FMV minus exercise price is treated as compensation.

Restricted stock - Recognition should be deferred until substantially vested.

No AMT adjustment is required.

Not subject to tax.

Positive AMT adjustment unles stock is exercised and sol in the same calender year.

At Date of Sale

w/ holding period not met

Holding period N/A for Nonstatutory stock options.

Basis is amount treated as compensation plus exercise price.

If sold same day as exercised, typically compensation is FMV minus exercise price and a short-term capital loss equal to the transaction fees.

No AMT adjustment is required.

If gain - FMV-exercise price is compensation; excess gain is capital gain.

If loss - The loss is a capital loss.

Negative AMT adjustment equal to positive adjustment at exercise date unless exercised and sold in the same calender year.

At Date of Sale

w/ holding period met

For Nonstatutory stock options this is the same as "w/holding period not met".

Income subject to capital gain or loss treatment.

Negative AMT adjustment required at exercise date.


Many times additional income from exercising stock options is large.  We recommend that you make estimated tax payments or adjust you income withholding accordingly.  This will help you to avoid costly penalties and interest that could accrue between the time you exercise and the time your taxes are due.

A statutory stock option is not taxed when it is exercised, but in the year that the stock is actually sold.  If the stocks are sold in the same year that they were exercised, then there is no advantage over nonstatutory stock options.

If the stock has decreased in value since being granted, it may not be wise to exercise the options before they expire.  Stock options will expire even when they are increasing in value so be careful not to miss out because they will have zero value if they do expire.

For further information about this topic, schedule a free consultation today.

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Silicon Valley Offices
7052 Santa Teresa Blvd. #305
San Jose, CA 95139
TEL: (408)912-7692
FAX: (877)229-5269
Ohio Valley Offices
9219 US Hwy 42 #D-293
Prospect, KY 40059
TEL: (502)709-7879
FAX: (877)229-5269
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