Tax Implications of Exercising Stock Options

To begin, employees are typically not granted full ownership of the options on the initiation date of the contract, also know as the grant date. The bargain element is calculated by subtracting the exercise price from the market price of the company stock on the date the option is exercised. Photo Credits tax time image by Tom Oliveira from Fotolia. You purchase your option shares with cash and hold onto them. Post a job online. Was this document helpful?

Taxation begins at the time of exercise. The bargain element of a non-qualified stock option is considered "compensation" and is taxed at ordinary income tax rates. For example, if an employee is granted shares of Stock A at an exercise price of $25, the market value of the stock at the time of exercise is $ The bargain element on the contract is ($50 to $25) x = $2,

What Does It Mean to Exercise a Stock Option?

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Selling Regular Options

What tax rate you pay when you exercise stock options depends on what kind of options you receive. Incentive stock options vs. nonqualified stock options There are two types of employee stock options. If your employer follows certain rules, then you can receive incentive stock options, which have favorable tax characteristics. You exercise the incentive stock options and sell the stock within the same calendar year: In this case, you pay tax on the difference between the market price at sale and the grant price at your ordinary income tax . Exercising stock options has immediate and delayed tax implications, which you can manage for maximum tax benefit by staying aware of key elements. The tax assessed on exercised stock options depends upon the type of option and when the acquired stock is sold.