Got ISOs? You need to understand their tax treatment
Incentive stock options allow you to buy company stock in the future at a fixed price equal to or greater than the stock’s fair market value on the grant date. If the stock appreciates, you can buy shares at a price below what they’re then trading for.
ISOs must comply with many rules but receive tax-favored treatment:
- You owe no tax when ISOs are granted.
- You owe no regular income tax when you exercise ISOs.
- If you sell the stock after holding the shares at least one year from the exercise date and two years from the grant date, you pay tax on the sale at your long-term capital gains rate. You also may owe the 3.8% net investment income tax.
- If you sell the stock before long-term capital gains treatment applies, a “disqualifying disposition” occurs and any gain is taxed as compensation at ordinary-income rates.
There also might be alternative minimum tax consequences in certain situations. If you’ve received ISOs, contact us. We can help you determine when to exercise them and whether to immediately sell shares received from an exercise or to hold them.
Wertz & Company, LLP, is an Irvine Tax Accounting and Professional Services Firm located in Orange County, CA that specializes in working with entrepreneurs along their journey to success.