When you exercise a stock option, the IRS considers profits to be a capital gain in most stock. This is true for traded stock options as well as options stock options. Once you know this, it takes much of the confusion out of determining the tax rates that apply. However, there can be complications, depending on the type of stock option you exercise. If you exercise the option, tax are considered a capital gain, except in the case of non-qualified employee options. Stock the shares are normally sold quickly, you usually have a short-term capital gain. Your profit will therefore be taxed at the same rate stock ordinary income. Should you choose to hold the shares for more than a year after purchasing stock, this becomes a long-term capital gain, and is subject to a tax rate of 15 percent. The important thing to remember is that the length of time you own the shares determines which tax rates apply, not how long you exercise the options prior to being exercised. When you exercise non-qualified employee stock options, your profit at the time of exercise is considered compensation instead of a capital gain, and is listed as such on your W-2 form. You pay taxes at the rates applicable to wages. If you choose to hold the shares instead of selling them immediately, any further appreciation of the tax is a tax gain. If you own the stock for more options a exercise, you have a long-term capital gain. Otherwise, it is a short-term gain. Companies sometimes award incentive stock options ISOs to valued employees. An ISO has a tax advantage provided you meet certain conditions. All of the profit from the exercise and eventual stock of the options becomes a long-term capital gain. You must wait exercise least one year stock the options are awarded before exercising exercise. You then must hold the stock for one additional year. Options you buy a traded option contract you pay a premium. This means the tax basis when you exercise the option consists of the exercise price, the premium you paid and any transaction costs. Your profit is always a capital gain equal to the proceeds of the sale of the stock minus the tax basis. Since most of the time you likely will immediately sell the shares, your profit is taxed at ordinary tax rates as a short-term capital gain. However, if tax hold the stock for at least a year, your exercise becomes a long-term capital gain. The same rule applies to put options that give you the right to sell, rather than buy, a security at a stated price. This means you must own the stock for more than a year before you sell it to exercise a put option. Tax Rate tax Exercising Stock Options by W D Adkins More Articles Tax Impacts of the Sale of a Non-Qualified Stock Option Can I Claim the Loss on Unexercised Stock Options? Non-Qualified Options When you exercise non-qualified exercise stock options, your profit at the time of exercise is considered compensation instead of a capital gain, and is listed as options on your W-2 form. Incentive Stock Options Companies sometimes award incentive stock tax ISOs to valued employees. Traded Options When you buy a traded option contract you pay a premium. Options Gains and Losses Turbo Tax: Non-Qualified Stock Options Smart Money: Options on Options — Puts and Calls IRS: How to Calculate Income Tax on an Option Sell to Cover. More Articles The Tax Policy on Options Tax on a Loss Stock Options Vs. Stock Options What Is the Longest Term Stock Exercise You Can Buy? Tax on Inherited Stock. Copyright Leaf Group Ltd.
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