|Tax Implications on Exercise*||Exercising a valid** ISO does not result in any taxable income, unless the employee is subject to Alternative Minimum Tax (“AMT”).||Exercising an NSO results in ordinary income equal to the difference between the fair market value of the stock on the date of exercise and the exercise price (the “spread”). This recognized income is also subject to income tax withholding and employment taxes.|
|Tax Implications on Sale of Stock||When the stock underlying an ISO is sold, the difference between the selling price and the option exercise price is taxed as capital gain.||If the stock is held for 1 year from the date of exercise and 2 years from the date of the option grant, then the profit is taxed as long-term capital gain.|
- If the grant is *not* early exercisable you want an ISO. Once the grant vests and you are eligible to exercise there will likely be a spread between your option price and the fair market value. If you hold an NSO, you will have to pay taxes on this spread.
- Assuming you can purchase all of the stock (vested and unvested) at the time of grant, you'll need to make sure you have the necessary funds to do so. If so, you will have no immediate tax liability since there will be no spread between your option price and the fair market value. Additionally if you have an NSO, the holding period for long-term capital gain will begin right away.
- Depending on the state your in, you generally do not pay AMT unless you have income greater than $250K or high deductions. It’s important you confirm that this before exercising an ISO as exercising can trigger AMT.
It’s always a good idea to consult with a lawyer or tax advisor if you’re not sure what the tax implications will be of receiving equity. For example, many employees don’t realize that they are subject to AMT treatment and find themselves with a large tax bill after exercising an ISO grant. A quick chat with an advisor will help you make an informed decision on the best form for your equity compensation.
- If you answer yes to either of these factors than your ISO will automatically be deemed an NSO unless the company takes certain measures.
|Date||# of Shares Vested|
|March 29, 2015||0|
|March 29, 2016||25|
|April 29, 2016||27|
|May 29, 2016||29|
|And so on monthly until four years later…|
|March 29, 2019||100|