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However, when you sell an option?or the stock you acquired by exercising the option?you must report the profit or loss on Schedule D of your Form 1040. If you've held the stock or option for one year or less, your sale will result in a short-term gain or loss, which will either add to or reduce your ordinary income.
If you exercised nonqualified stock options (NQSOs) last year, the income you recognized at exercise is reported on your W-2. It appears on the W-2 with other income in: Box 1: Wages, tips, and other compensation. Box 3: Social Security wages (up to the income ceiling)
When you exercise your employee stock options, a taxable benefit will be calculated. This benefit should be reported on the T4 slip issued by your employer. The taxable benefit is the difference between the price you paid for the shares (the ?strike price?) and their value on the date of exercise.
In this situation, you exercise your option to purchase the shares but you do not sell the shares. Your compensation element is the difference between the exercise price ($25) and the market price ($45) on the day you exercised the option and purchased the stock, times the number of shares you purchased.
Non-qualified stock options require payment of income tax of the grant price minus the price of the exercised option. NSOs might be provided as an alternative form of compensation. Prices are often similar to the market value of the shares.
After you exercise an option or receive free stocks, your employer should note the value of the benefits you received, and he should report that amount in box 14 of your T4 slip.
New Rules. As of July 1, 2021, the New Rules limit the availability of the Stock Option Deduction to an annual maximum of $200,000 in a calendar year (the Annual Vesting Limit) calculated based on the fair market value of the underlying securities on the date of the grant.
The security options benefit is taxable to you as employment income in the year you exercise the options. It's reported to you on your T4 tax slip, along with your salary, bonus and other sources of employment income. The security options benefit is normally added to the adjusted cost base (ACB) of your shares.