Many San Francisco residents are offered the opportunity of stock options in the company for which they work, and these are often offered by start-ups because they act as an incentive for workers to help in the growth of the company by giving them a sense of ownership of part of the business.
In fact, according to the National Center for Employee Ownership, approximately 6,500 employee stock ownership plans cover 14 million participants throughout the US.
There are two types of stock options – puts, which are bets that a stock will fall, and calls, which are a bet that it will rise. Stock options give an investor the right to buy or sell the stock at an agreed price at a date in the future.
Stock options which are given to employees are generally call options which allow the employee to buy the stock at a fixed price within a specific time frame. So, if there is an option to buy at, say, $1 per share and in the meantime the price rises to $1.50 by the specified date, the employee can then make a notional profit of $0.50 by buying on the set date. He or she could also buy, and then sell immediately, making the profit in cash. Obviously, this gives the employee an incentive to work hard in order to expand the business and make the stock increase in value.
Two Types Of Stock Options
In fact, there are actually two types of stock options – American and European. European options are not very common, but these only allow the holder of the option to buy on the expiration date. American options allow the holder to buy at any time between the start and the expiration date.
Another situation that can arise is that the employer grants, say, 1,000 shares on the grant date, with 250 shares vesting one year later. That means that the employee can only exercise 250 of the share total. Then the next 250 could be vested the following year.
However, taxes for stock options can be different. There are two types of stock options – non-qualified stock options (NSO) and incentive stock options (ISO). In the case of an NSO any profit becomes taxable at the moment you exercise the option. With an ISO, the exercise date is not a taxable event. Here’s where an effective tax accountant can come in; a tax accountant can help you optimize the income you get from a stock options vis-a-vis the taxable event.
Taxes for stock options can also involve both income tax and/or capital gains tax. These will depend upon the exercise price and the value of the shares at the point of sale. There is also a situation where a higher-earning employee may have to make an AMT – alternative minimum tax – adjustment based on the difference between the exercise price and the current market price.
As you can see, taxes for stock options can get complicated, but at Safe Harbor, our San Francisco tax advisors can help you find your way through the woods!