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Nonqualified Stock Options
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Tax Consequences
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An employee receiving a nonqualified
stock option may be taxed, in most cases, at any of the following times:
(1) when the option is received;
(2) when they exercise the option; or
(3) when restrictions (if any) on disposition of the stock (acquired by the option)
lapse.
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Timing of Tax
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Employees or independent contractors receiving nonqualified stock
options are taxed upon receipt if the option has a readily ascertainable fair market value
(FMV). This rule usually applies to publicly traded stock. In almost all other situations,
however, the employee is taxed when the nonqualified option is exercised. In either case,
the income is the FMV of the stock minus the strike price (the price paid per share to
exercise an option). In contrast, employees who receive a statutory stock option are not
taxed until they sell the stock.
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Vesting
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Most companies require that employees work for a requisite period or meet
certain performance goals before they are eligible for nonqualified stock options. Once
those requirements are satisfied, the options become "vested," regardless of
whether or not he or she chooses to exercise any options.
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Additional Resources
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For additional information on Nonqualified Stock Options and
employee stock options in general, please see the Tax Prophet's section Employee Stock Options..
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| All contents copyright © 1995-2003 Robert L. Sommers, attorney-at-law. All rights reserved. This internet site provides information of a general nature for educational purposes only and is not intended to be legal or tax advice. This information has not been updated to reflect subsequent changes in the law, if any. Your particular facts and circumstances, and changes in the law, must be considered when applying U.S. tax law. You should always consult with a competent tax professional licensed in your state with respect to your particular situation. The Tax Prophet® is a registered trademark of Robert L. Sommers.
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