Stock Markets Exposed
Tax on Stock Options?
Lets just say I exercise my stock options in Jan or Feb. Considering I dont have to settle with the IRS till that following year, can I avoid handing over the tax $ immediately and invest that for the year to make back some of the $ I will lose from taxes?
Public Comments
- Sure, you can avoid handing over the tax $ immediately, but just as long as come year end you owe less than $1,000 or have paid at least 90% of your current tax year liability or 100% (110% if high income person) of prior year tax liability. And of course if you make any money from investing the tax money that you didn't pay, you will be taxed on that as well.
- It is not always the case that you can escape withholding. For example, if you are an employee and you exercise a nonqualified stock option, withholding is required. There are other cases where withholding is required when there is compensation in the form of stock. You can ask your HR or payroll department if withholding is required in your case. The previous answer regarding penalty is true. But even if you have mandatory withholding, you may still be subject to a penalty for underpayment of tax.
- If you are granted a statutory stock option under an employee stock purchase plan or an employee incentive stock option (ISO) plan, you generally do not include any amount in your gross income as a result of the grant or exercise of your option. However, you may be subject to Alternative Minimum Tax in the year you exercise an ISO. You have taxable income or deductible loss when you sell the stock you received by exercising the option. You generally treat this amount as a capital gain or loss. For most nonstatutory options, there is no taxable event when the option is granted and the fair market value of the stock received on exercise, less the amount paid, is included in income when the option is exercised. Just remember, as answer #1 points out, if you don't have enough withholding, you can be penalized at the end of the year for the shortfall.
- There are several types of Stock Options and a number of ways that you could exercise those options. Most of the time these are NQ options and the exercise is handled by a brokerage appointed by the employer. In that case the stock is sold on or about the same time as the exercise and withholding is required which will be reported on your W-2 along with the income to you. Make sure that you properly report the 1099B you will get for this stock sale.
