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If you find yourself sorting through a maze of vesting schedules, option plans, investing data and tax advice, this book is for you. It will give you the information you need, defining terms and concepts and explaining how most ESOPPs work. While you will still need the specifics of your own corporate plan, this guide will help you know what questions to ask and how to understand the answers. From explaining stock options to risk assessment, Alex will walk you through the exciting and complex world of employee ...
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If you find yourself sorting through a maze of vesting schedules, option plans, investing data and tax advice, this book is for you. It will give you the information you need, defining terms and concepts and explaining how most ESOPPs work. While you will still need the specifics of your own corporate plan, this guide will help you know what questions to ask and how to understand the answers. From explaining stock options to risk assessment, Alex will walk you through the exciting and complex world of employee stock options.
This chapter is a general discussion about taxes and employee stock options. Please don't consider it expert advice on tax matters.
I will cover the general principles that apply in most cases. However, as I am sure you are aware, the tax code is very complicated. You should always consult a tax professional with specific questions about your particular tax situation.
This chapter also deals strictly with stock options and unrestricted stock. If you receive stock through an employee stock option plan that has any restrictions on it, please consult a tax professional. The tax rules for restricted stock can be very different from the rules for options.
It is possible, for instance, to use vested stock options to acquire unvested stock. I discuss stock plans in Lesson 13, "Employee Stock Purchase Plans," and Lesson 14, "Employee Stock Ownership Plans:"
For most people covered by employee stock options plans, the tax rules are relatively straightforward and easy to understand. In Lesson 10, "Taxes and Your Options," I relate them directly to options.
Not only are the tax rules complicated, they use a language that only an accountant could love. Fortunately, it's not hard to learn the few terms that are required to deal with stock options.
The tax code generally recognizes two types of income for individual taxpayers: ordinary income and capital gains.
The simplest way to understand ordinary income is that it is everything except capital gains. Yoursalary, dividends, interest, and so on are all considered ordinary income.
Obviously this definition doesn't address items like Roth IRA distributions, gifts, and so on. Since this book is not a tax guide, I'll pass right on by those complications and stick with how the tax code impacts options.
Capital gains (and losses) refer to the sale for a profit or a loss of a capital asset. For our purposes, this specifically refers to the stock you acquired through an employee stock option plan.
There are two types of capital gains or losses: long-term and shortterm. The calendar decides which is which.
If you hold stock for more than one year (at least a year and one day) and sell it for a profit, that is a long-term gain. Any stock sold before the year and one-day limit is a short-term gain.
Why is this important to know? The long-term capital gains tax rate is 20 percent (10 percent if you are in the 15 percent tax bracket). The short-term capital gains tax rate is the same as ordinary income. For a person in the top tax brackets this can be significant, as we see later in this chapter. However, even persons of modest means can benefit by taking advantage of capital gains treatment.
You can generally use long- and short-term capital losses (in other words, selling your stock at a loss) to offset capital gains. See your tax professional for specific advice.
Tax brackets and how they relate to what you actually pay in taxes is a misunderstood topic. I'll try to make sense of it for you.
Individual taxpayers are assessed taxes on the amount of taxable ordinary income they have in the tax year using tax brackets. The more you make, the higher your tax bracket....
1. Employee Stock Options.
Everybody Wants Stock Options. Goals. What Is an Employee Stock Option? Different Types of Options. ESPPs. Alternative Plans. The 30-Second Recap.
2. Why Options Are Important.
Options as Compensation. Options as a Motivator. Placing a Value on Your Options. Options and Your Portfolio. The 30-Second Recap.
3. An Investing Primer.
You're an Investor Now. Investing Short Course. Investing Basics. Options. The 30-Second Recap.
4. All About Vesting, Lock-Ups, etc.
Vesting. What If I Leave? Lockup Period. The 30-Second Recap.
5. Incentive Stock Options.
Incentive Stock Options Defined. Holding Period. Exercise Price. Miscellaneous Points. Advantages of ISOs. Tax Consequences of ISOs. Disqualifying Disposition. Alternative Minimum Tax Consequences. The 30-Second Recap.
6. Nonqualified Stock Options.
Nonqualified Stock Options Defined. Few NSO Rules. Options as a Bonus. Price. Options as Motivators. Flexibility of NSOs. No Limits. Tax Consequences of NSOs. The 30-Second Recap.
7. When to Exercise Your Options.
Cashing In on Your Options. What Are Your Options? The 30-Second Recap.
8. Exercising Your Options.
The Process. Which Options to Exercise. Paying for the Stock. Cashless Transaction. Using Stock to Exercise Options. The 30-Second Recap.
9. Taxes and Options.
Tax Warning. Tax Terms. Alternative Minimum Tax. Long-Term Capital Gains. The 30-Second Recap.
10. Taxes and Your Options.
Taxes and Nonqualified Stock Options. Taxes and Incentive Stock Options. The 30-Second Recap.
11. Options and the IPO.
Winning the Lottery. Initial Public Offering (IPO). Securities Laws. Options and the Private Company. Underwriters. Taxes. The 30-Second Recap.
12. Options and the Private Company.
The Private Company. Complications. Tax Issues. Vesting. Employee Stock Purchase Plans. Stock Appreciation Rights. The 30-Second Recap.
13. Employee Stock Purchase Plans.
Not an Option, but Close. ESPP Features. How the ESPP Plan Works. Taxes. ESPPs as an Investment. The 30-Second Recap.
14. Employee Stock Ownership Plans.
Owning the Company. What Is Their Goal? Qualifying the Plan. How ESOPs Work. Taxes on ESOPs. ESOPs as an Investment. Timing. The 30-Second Recap.
15. More Strategies and Tips.
Additional Help. Divorce. Transfer Options. Section 83b. Psychological Factors. Independent Contractors and Others. Noncompete Provisions. Repricing Options. Death and Disability. Asking for Help. The 30-Second Recap.
16. Frequently Asked Questions.
No Simple Answers. Employment and Termination. Employee Stock Purchase Plans. Exercising Your Options. Insider Trading. Your Estate and Options. Disability. Bought and Sold. Vesting Issues. Selling My Stock. The 30-Second Recap.
Appendix A: Glossary.
Appendix B: Further Reading.