Taxable Stock Options
July 4th, 2010Question: Taxation - Stock Option Plans ??? ?
Hi,
I wanted to know what happens to your taxable income when :
the options granted from an employer to acquire say, 1000 shares are sold at 12$.
Say now that the FMV = $10.00 at this time. (all this in 2006)
When I exercise my options, the FMV = 18.25. (2008)what would be my capital gain? Wouldn't it be a capital loss?
Thanks in advance !
So I just calculated what I think is right and this is what I amount to:
FMV = 18,250
ACB = (10,000)
increase in net income for tax purposes = $8,250
deduction (1/2 X 8,250)
increase in taxable income = 4,125$Is this right?
Answer: It depends on what type of stock option this is - Nonstatutory or Statutory (ESPP or ISO).
If it is a Nonstatutory Stock option the most common result is compensation income on the difference between the exercise price and the FMV at the time of exercise. In the example you provided this would amount to $18250 less the exercise price $10,000 (1000 shares @ $10 ea.) which would increase your taxable income on your W-2 by $8250. You now have a cost basis in the stock of $18,250 so if immediately sold the 1000 shares at $18.25 per share you would recognize no capital gain or loss even though the sale is still reportable on Sch D.
If this was an employee stock purchase plan, ESPP, it would depend on timing. No compensation income is reportable if the stock is not disposed of within two years after the grant or within one year after the excerise date and at all times during the period beginning with the grant date and ending on the date three months prior to the excerise the optionee is an employee of the corporation granting the option.
In your example if you had a qualified disposition----meaning you met the criteria I explained above---you would have to recoginize $2 per share as ordinary income (I am assuming your example is saying your excerise price is $10 per share and the FMV at the time of grant is $12 per share) this is your orginal bargain. You would have a capital gain of $6.25 per share or $6250 since your basis is the original $10 per share plus the $2 orginal bargain reported as ordinary income.If this is an ISO, incentive stock option, the entire gain from the sale of the stock may be treated as capital gain, even though the stock was acquired at a cost of less than FMV. It has to meet the same holding requirements as the ESPP does to qualify. In this example the stock would have to be held for more than a year after you excerise the option and the $8.25 gain per share would be taxed at the favorable capital gains rate.
Hope this helps.
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