Tax Tip Spotify Podcast and/or WordPress Blog Post understands that your employer has granted you Nonstatutory Stock Options and that you would like some basic information regarding the tax implications of this grant.
A nonstatutory stock option is a stock option that :
- is granted in connection with the performance of services and
- does not qualify as either of the two types of statutory options – i.e., incentive stock options or employee stock purchase plan options.
The tax treatment of nonstatutory stock options depends on whether the option had a readily ascertainable fair market value at the time the option was granted. Since the vast majority of nonstatutory stock options do not have a readily ascertainable fair market value at the time they are granted, this letter focuses on those options.
Generally, you are not taxed on the value of the options at the time your employer granted you the options. If the stock you receive when you exercise the options is substantially vested (i.e., the stock is either transferable by you or is not subject to a substantial risk of forfeiture) at the time of exercise, you must include in your gross income for the year of exercise the difference between (1) the amount you paid to exercise the option and (2) the fair market value of the stock on the exercise date (i.e., the “spread”).
If the stock is not substantially vested at the time you exercise the options (i.e., the stock is both nontransferable by you and subject to a substantial risk of forfeiture), you must include the spread in your gross income in the year the stock becomes substantially vested. However, you may be eligible to make an election to defer this income for up to five years by making a so-called “Section 83(i) election” within 30 days of vesting. Your employer is required to provide notice to you at the time your rights in the stock vest if you are eligible to make a Section 83(i) election.
Your holding period for the stock you acquire under the options begins on the day after the date you exercise the options. Generally, your basis in the stock will be equal to the sum of:
(2) the amount you include in income on exercise of the options; and
Please contact the office of Don Fitch Accountancy at (760)567-3110 or Email Don.Fitch@CPA.com if you have any questions or would like additional information.
DON FITCH, CPA
74478 Highway 111 #3
Palm Desert, CA 92260
Toll Free: (877)CPA-Help or (877)272-4357
P.S. My firm is based upon referrals. Please feel free to refer my firm to anyone you know that is looking for a new CPA and/or tax preparer. Thank you in advance.
(Updated 05122021-1 320-317)