Stock options are emplo🦂yee benefits that enable an employee to buy their employer’s stock at a discount to the stock’s market price. The options do not convey an ownership interest, but exercising them and acquiring the stock does.

There are different types of options, each⛎ wit🌱h its own tax implications.

Types of Stock Options

澳洲幸运5官方开奖结果体彩网: Stock🅠 optiಌons fall into two categories: 

• Statutory stock options, which are granted under an employee stock purchase plan or an incentive stock option (ISO) plan
• Nonstatutory stock options, also known as 澳洲幸运5官方开奖结果体彩网:non-qualified stock options, are granted without any type of plan

Tax Rules for Statutory Stock Options

The grant of an ISO 𒁏or other statutory stock option does not produce any immediate income subject to regular income taxes. Nor does the exercise of the option to obtain the stock, as long as you h🌜old the stock for one year after acquiring it. Income results when you later sell the stock acquired by exercising the option.

Alternative Minimum Tax Rules

However, exercising an ISO may require an adjustment for purposes of the 澳洲幸运5官方开奖结果体彩网:alternative minimum tax, or AMT. The adjustment is the d🦩ifference between the fair market value of the stock acquired through the exercise of the ISO and the amount paid for the stock, plus the amount paid for the ISO, if any:

Fair Market Value of Total Shares - [ (Strike Price at Exercise x Number of Shares) + ISO Price ]

Importantly, the adjustment is required only if your rights in the stock are transferable (can be sold, exchanged, or transferrᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚed to another) and not subject to a substantial risk of forfeiture in the year the ISO is exercised.

Furthermore, the fair market value of the ✨stock for purposes of the adjustment is determined without regard to any restriction lapse when rights in ജthe stock first become transferable or when the rights are no longer subject to a substantial risk of forfeiture.

If you sell the stock in the same year you exercised the ISO, no AMT adjustment is required. This is because the tax treatment becomes the same for regular tax and AMT purposes.

If you have to make an AMT adjustment, increase the stock's cost basis by that amount. Doing this ensures that when the stock is sold in the future, the taxable gain for AMT purposes is limited, which means you don't pay tax twice on the same amount.

How Reporting Works

When you exercise an ISO, your employer issues Form 3921—Exercise of an Incentive Stock Option Plan under Section 422(b), wh🍬ich provides the information needed for tax-reporting purposes.

How to use information on Form 3921 to report the exercise of an ISO:

Imagine that this year you exercised an ISO to acquire 100 shares of stock, the rights of which became immediately transferable and not su♉bject to a substantial risk of forfeiture. You paid $10 per share (the exercise price), which is reported in box 3 of Form 3921.

On the date of exercise,🌜 the fair market value of the stock was $25 per share, which is reported in box 4 of the form. The number of shares acquired is listed in box 5.

澳洲幸运5官方开奖结果体彩网: The AMT adjustment is $1,500:

( $2,500 [ $25 x 100 shares ] minus $1,000 [ $10 x 100 shares ] ) = $1,500.

How to use information on Form 3922 to report the sale of ISO-exercised stock:

When you sell the stock acquired through the exercise of an ISO or an employee stock purchase plan, you report a gain or loss on the sale. If the stock was acquired at a discount under an employee stock option plan, you’ll receive Form 3922—Transfer of Stock Acquired Through an Employee Stock Purchase Plan from your employer or the corporation’s transfer agent.

The information on this form helps you determine the amount of gain or loss, and whether it🐷 is capital or ordinary income.

Tax Rules for Nonstatutory Stock Options

For the nonstatutory type of stock option, there are three events, each with its own tax res🙈ults:

1. The grant of the option
2. The exercise of the option
3. The sale of stock acquired through the exercise of the option

1. The receipt of these options is immediately taxable only if their 澳洲幸运5官方开奖结果体彩网:fair market value can be readily determined (e.g🐲., the option is act🅺ively traded on an exchange). In many cases, however, there is no readily ascertainable value, so the granting of the options does not result in any tax.

2. When you exercise t🅺he option, you include, in income, the fair market value of the stock at the time you acquired it, less any amount you paid for the stock. This is ordinary wage income reported on your W2, therefore increasing your tax basis in the stock.

3. Later, when you sell the stock acquired through the exercise of the options, you report a 澳洲幸运5官方开奖结果体彩网:capital gain or loss for the difference between your tax basis and what you receive on the sale.

The Bottom Line

Stock options can be a valuable employee benefit because they convey the opportunity to buy a company's shares at a discounted price. However, the tax rules that concern stock options are complicated. Therefore, if you receive stock options, you should talk to a tax advisor to determine how these tax rules may affect you.