What You Need to Know about Stock Options
- Statutory or qualified options. These options are governed by specific Tax Code Sections.
- Non-statutory or Non-qualified options. These options are governed by the general Tax Code Sections of general compensation.
When you receive a non-qualified option, you have taxable compensation/ordinary income equal to its fair market value in the year the option is granted and this amount is generally added to your W-2. If an employee pays for an option at the time of its granting, then he or she would recognize value/report taxable income of the fair market value of the option less its cost. The employee then is not taxed again until the stock is sold. The basis of the stock purchased is calculated as the option price of the stock and the fair market value of the option on which he paid taxes. The employee’s holding period of the stock then begins the day after the stock option is exercised and subsequent gains/losses recognized as one would on any other capital asset.
If you have a large number of options, you will want to ensure that planning for these options is correctly calculated, invested, and recorded. Please review your plan and its description, which you can obtain from your company’s personnel office. If you have been employed at one location for a number of years you may find that you have an undue emphasis on your employer’s stock. Accordingly coming up with a systematic method/dollar cost averaging of selling your company’s stock and purchasing other investments so as to diversify your overall reliance of your portfolio is a good idea. Consideration of your company’s overall performance averages, your tolerance for risk, and the number of options yet to be exercised.
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