Taxation of non statutory stock options

ISOs are only available to employees not non-employee directors or independent contractors , and there are mathematical limitations on the amount of an option that can qualify as an ISO. The problem is that this statement, while technically true, is not complete—because the spread on the exercise of an ISO is an alternative minimum tax adjustment.

Thus, depending on the particular circumstances of the optionee exercising an ISO, the alternative minimum tax due as a result of the exercise can be quite significant. Please see the article I wrote on this point.

No, there is no tax on the receipt of an NQO as long as the exercise price of the stock option is equal to the fair market value of the stock on the date of grant.

The spread on exercise—meaning, the amount by which the fair market value of the stock at the time of exercise exceeds the exercise price—is ordinary income, and subject to ordinary income and wage witholding.

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Your capital gains holding period does not start until you exercise the stock option. Google Twitter Facebook Tumblr LinkedIn 5 Responses to "Nonqualified or Nonstatutory Stock Options" By Michael Andrews May 3, - 5: Where is that to be found in the Internal Revenue Code?

That is correct James.

Once you exercise your NSO, you then start your capital gains holding period. So after you exercise your stock option and buy the stock, then you begin your holding period for capital gains.

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So, if you hold your stock for at least 1 year and 1 day starting the day after you exercised your option, then you dispose of it, you can still qualify to pay the capital gains rate rather than ordinary income rate because of the fact it was a long-term capital gain. Notify me of follow-up comments by email. Notify me of new posts by email.

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Is the receipt of a nonqualified stock option taxable? What are the tax consequences of exercising a nonqualified stock option? When does my capital gains holding period start on stock option shares?

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