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Learnvest Get started with a free financial assessment. Often this price is at a discount to what the shares were worth on the market at the time they were granted.
Stock options come in two main flavors: The main difference between these two is how they are treated when it comes time to pay taxes.
Vesting is the amount of time you have to be employed before you can take advantage of your stock options. By making you wait, the employer is enticing you to stick with the company for some specified amount of time.
Usually, a company will have a vesting schedule for your options. For instance, they may offer you a package that vests over four years, with a one-year cliff. This means that if you left after working for two years, you would only have the right to purchase half of your total options package.
You can only exercise as many options as you are vested for. Once you are vested, you usually have a specified amount of time to purchase the shares before your options expire. Some people choose to exercise their options as soon as they are eligible. Others wait to exercise until the share price is at a level at which they would be willing to sell e. This is the amount of money your stock would be worth if it were sold on the open market on the day that you exercised your stock options.
Non-qualified stock options, sometimes abbreviated as NSOs or NQOs, are more commonly offered by companies than incentive stock options. As such, when you exercise a non-qualified stock option, you will pay taxes two times. You will first pay ordinary income tax on the difference between the fair market value and the exercise price of the stock, as this difference is considered compensation by the IRS even if you haven't actually made any money by selling the shares.
If you sell at a loss, you can record it as a capital loss for tax purposes. Incentive stock options, also known as ISOs, have a more favorable tax treatment. When you exercise ISOs, you do not pay ordinary income taxes on the difference between the fair market value and the exercise price, as you do with NSOs.
Instead, you only pay capital gains taxes or record a capital loss when you ultimately sell your stock. ISOs also have holding periods you have to meet before you can sell them. You must hold them for at least 2 years from the date of the option grant and at least one year after exercising them; otherwise you may lose out on their tax benefits.
A restricted stock award is a predetermined amount of stock that belongs to an employee once certain restrictions have been met. These restrictions are usually related to a vesting period, employee or company performance or some combination thereof.
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Restricted stock is different from stock options in that there is usually no purchasing involved. Regular employee stock options grant you the right to purchase stock at an exercise price, but restricted stock is awarded to you outright after the restrictions are lifted. Some companies may require you to purchase a restricted-stock grant from them, but this is less common.
You will, however, have to pay taxes. An employee stock purchase plan ESPP is a form of equity compensation that some companies offer their employees, with the intention of making it easier for workers to purchase company stock sometimes at a discounted price.
ESPPs allow employees to use after-tax payroll deductions to buy the shares; the employer then holds the contributions in an account until a specified purchase date that typically comes around every six months. This publication is not intended as legal or tax advice.
Taxpayers should seek advice based on their particular circumstances from an independent tax advisor. LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc.
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Information shown is for illustrative purposes only and is not intended as investment advice. Please consult a financial adviser for advice specific to your financial situation.
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