Introduction
As a CPA in Trinity, Florida, I have had many clients come to me with questions about the tax treatment of stock options and equity compensation. It is a complex area of taxation that can be confusing for many professionals in Tampa Bay. In this blog post, I will break down the basics of how stock options and equity compensation are taxed, and provide some insights for navigating this area of taxation.
Stock Options
Stock options are a common form of equity compensation that companies offer to their employees as a benefit. When an employee is granted stock options, they have the right to purchase company stock at a predetermined price, known as the exercise price. The tax treatment of stock options depends on the type of stock option granted: incentive stock options (ISOs) or non-qualified stock options (NSOs).
ISOs
ISOs are given special tax treatment under the Internal Revenue Code. When an employee exercises an ISO, there is no ordinary income tax due at that time. Instead, the employee may be subject to alternative minimum tax (AMT) on the difference between the exercise price and the fair market value of the stock at the time of exercise. If the employee holds onto the stock after exercising the option, any additional gain will be taxed at the lower long-term capital gains rate.
NSOs
On the other hand, NSOs are subject to ordinary income tax on the difference between the exercise price and the fair market value of the stock at the time of exercise. Any subsequent gain will be taxed as either short-term or long-term capital gains, depending on the holding period.
Equity Compensation
In addition to stock options, companies may offer other forms of equity compensation such as restricted stock units (RSUs) or stock appreciation rights (SARs). These forms of equity compensation are also subject to complex tax treatment that varies depending on
