Are employee stock options taxable?
UPDATED: December 16, 2019
It’s all about you. We want to help you make the right legal decisions.
We strive to help you make confident law decisions. Finding trusted and reliable legal advice should be easy. This doesn't influence our content. Our opinions are our own.
Stock options are an employment incentive tool used by many large corporations that provide their long-term employees with options to buy stock at a certain price, called a strike price. Once the stock hits the strike price set in the employee stock option plan, employees may purchase the stock at anytime before the stock options expire. As with stocks generally, stock options have no easily determined and stable value. Therefore, you are generally not required to include any amount of stock options or actual stocks in your gross income for tax purposes. Instead, you report income or loss when you sell the stock that you purchased under a company stock option plan.
How Stocks are Taxed
To understand how stock options are taxed, it helps to understand how stocks are taxed. Stocks are not taxed when you receive them, nor are they taxed when they increase or decrease in value. The IRS only taxes "viable" income, meaning money or its equivalent value in land. The volatility of the stock market prevents the value of stocks from being accurately determined, because stocks are bought, sold and held in "shares" that constantly fluctuate in worth. This is why stocks are not taxed while they are actively invested in the company. When you sell the stocks, on the other hand, you will have a solid, viable, reportable income which is determined by comparing the price at which you received the stocks to what you gained when you sold them.
Taxing Employee Stock Option Purchases
The profit you receive from the amount you gain from the sale of the stocks minus what you paid for the stocks must be reported to the IRS. If the stocks were part of an employee stock option program through your employer, and you did not pay any value for them initially, the income you report will be the total amount of income you received from the sale of the stock. If the company stock option plan required purchase of the company stock with some of your salary, the income you report will be equal to the amount of the sale of the stock minus the amount you paid. If you did pay some value for the stock, the stock may have decreased in value from what you originally paid. In this case, just as if the stock increased in value, you should subtract the amount that you paid for the stock from the sale amount of the stock. The result will be a negative number which represents the amount of money you lost. If you never sell your stocks and the company never cashes them in, you will not need to report any income for those stocks. However, if over the years you receive dividends for your investment, you must report the dividend payments as income, even if you reinvest it in more stocks.
You should also note that profit gained from the exercise of different types of stock options may be taxed at different rates depending on the type of employee stock option and circumstances. If you have exercised company stock options and subsequently sold the stock, or you are considering selling the stock, you should contact a tax attorney to find out how the sale might affect your tax situation.