An Example<\/strong><\/p>\n\n\n\nLet\u2019s say you have been hired on January 1, 2023, by a great public company whose stock is trading at $100 per share. As part of your compensation package, your brand-new employer grants you 100 NQSOs for each of the next four years, totaling 400 shares. This doesn\u2019t mean that you have directly received 400 shares of stock, only that you\u2019ve been granted the option to buy them, and it often involves certain conditions being met, such as working at the company for a certain period of time; these details would be spelled out in your contract.<\/p>\n\n\n\n
Usually, there\u2019s a vesting schedule to abide by, such as being available each quarter. In our example, on each anniversary of your hire date with the company, another 100 options will be available to you to be exercised, or \u201cpurchased.\u201d<\/p>\n\n\n\n
Under some ISO plans, you may have to pay something for those stock options, or at least a portion. The company could give the options to you for free or offer them at a percentage of their value. For example, if you received them for free and you exercise the options when they\u2019re trading at $100 per share, then $10,000 is added to your paycheck on paper, even though the actual amount of cash you take home is the same each pay period. Selling your shares creates capital gains, which are taxed at a lower rate than straight income. That <\/em>is where ISOs can benefit you.<\/p>\n\n\n\nIn some cases, an employer might offer you the option to invest at a discounted rate \u2014 for example, at 75% of the value. This is called Restricted Stock (RS). So if the stock is worth $100, your share basis is $75. This is the cost you would deduct on your tax return (and the compensation amount that will be added to your paycheck). When you sell the stock, you will pay capital gains only on the 25% remaining plus any appreciation occurring after the exercise of the RS.<\/p>\n\n\n\n
Recommendations<\/strong><\/p>\n\n\n\nAs I said earlier, this is a complicated topic that many struggle to understand, which is why we\u2019re here to help. Before you accept an ISO or make decisions about exercising options or selling stocks, you should speak with a financial advisor and a CPA. But in general, here are some recommendations from us as to what to do with your stocks once you\u2019ve exercised them:<\/p>\n\n\n\n
\n- Hold on to stocks for at least 12 months. <\/strong>By holding on to your stocks for at least a year, you generate long-term capital gains. Selling before that threshold is considered a short-term gain, which is taxed at ordinary tax rates, meaning there\u2019s no financial advantage to you. If you can, try to let them sit there gaining in value for at least year \u2014 particularly if the stock is growing rapidly and you don\u2019t have an immediate need for the money.<\/li>\n\n\n\n
- Diversify your holdings as soon as you can. <\/strong>The most sophisticated tax-planning clients know that it\u2019s best to diversify your stock holdings so that you aren\u2019t holding stocks only in your company. Obviously, if the company is growing, having many shares in the company is great, but it\u2019s a risk to put all your eggs in one basket. Diversifying your holdings as soon as possible after the first 12 months, as long as no major disruptions to the value of the stock are expected within that year, usually makes good financial sense.<\/li>\n<\/ol>\n\n\n\n
Our team at Ludmila CPA loves talking to clients about tax planning, including the various details involved with ISOs. And since we\u2019re knowledgeable about multistate tax compliance, it doesn\u2019t matter where you\u2019re located; we can still assist you. Contact us<\/a> to set up your tax planning appointment today!<\/p>\n","protected":false},"excerpt":{"rendered":"Understanding Taxes on Incentive Stock Options Direct income is frequently the first consideration we have when a job offer presents itself. But there are other kinds of compensation that an employer can offer that also are valuable and could even […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[6,8],"tags":[],"_links":{"self":[{"href":"https:\/\/ludmilacpa.com\/wp-json\/wp\/v2\/posts\/453"}],"collection":[{"href":"https:\/\/ludmilacpa.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/ludmilacpa.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/ludmilacpa.com\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/ludmilacpa.com\/wp-json\/wp\/v2\/comments?post=453"}],"version-history":[{"count":3,"href":"https:\/\/ludmilacpa.com\/wp-json\/wp\/v2\/posts\/453\/revisions"}],"predecessor-version":[{"id":458,"href":"https:\/\/ludmilacpa.com\/wp-json\/wp\/v2\/posts\/453\/revisions\/458"}],"wp:attachment":[{"href":"https:\/\/ludmilacpa.com\/wp-json\/wp\/v2\/media?parent=453"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/ludmilacpa.com\/wp-json\/wp\/v2\/categories?post=453"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/ludmilacpa.com\/wp-json\/wp\/v2\/tags?post=453"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}