California Stock Option Grants and Exercises and Fiscal Year-End Values
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FAQ
You're not liable for income tax until your stock grant vests, at which point you must report income equal to the value of the stock you received.
When you exercise nonqualified stock options, your employer will most likely withhold a flat 22% for federal income taxes. However, you might be under-withheld if you're in the 32%, 35%, or 37% tax bracket. Stock options can be advantageous but can also create unexpected tax consequences.
Stock options are typically taxed at two points in time: first when they are exercised (purchased) and again when they're sold. You can unlock certain tax advantages by learning the differences between ISOs and NSOs.
In some cases, your RSUs may be taxed twice. The good news is that you will not owe taxes on your RSUs right away at grant. They do not have any real value until they vest, which can be years down the road depending on the company you work for and if they are public or private.
Every stock option has an exercise price, also called the strike price, which is the price at which a share can be bought. In the US, the exercise price is typically set at the fair market value of the underlying stock as of the date the option is granted, in order to comply with certain requirements under US tax law.
If this amount is not included in Box 1 of Form W-2, you still must add it to the amount of compensation income that you report on your 2023 Form 1040, line 7. You also must report the sale of the stock on your 2023 Schedule D, Part II as a long-term sale.
For nonstatutory options without a readily determinable fair market value, there's no taxable event when the option is granted but you must include in income the fair market value of the stock received on exercise, less the amount paid, when you exercise the option.
How Are Stock Options Taxed? Stock options are taxed or the loss is deducted when the holder of the stock sells the stock they bought when they exercised their stock option. The gain will usually be taxed at a capital gains tax rate.