Employee stock options are a great incentive that can be integrated into many compensation packages. Often, employees are able to buy company shares at a discount, which provides a great opportunity to accumulate wealth if the stock performs well.
But the second piece of the puzzle tries to understand how taxes for employee stock options work. It can easily become a nightmare if you have never considered stock options before. Here are a few insights to clear up the confusion so you can maximize the potential of this incredible work benefit.
This is how stock options work
There are two main types of stock options that you can receive as part of your compensation gift: incentive stock options and unqualified stock options. The main difference between these two is how they are treated for tax purposes when you exercise the options.
Incentive stock options (ISOs), also known as statutory stock options, are granted under a share purchase plan. However, unqualified stock options (NSOs) are granted without a specific type of plan and are often called non-statutory stock options. As we will see below, NSOs do not qualify for the same tax benefits that ISOs receive.
When you have employee stock options, there are three special occasions you need to be aware of: the date your company granted you the options when you exercised them and how long you have the shares you receive on the exercise before you sell them. These moments play an important role in your tax calculation.
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