Skip to content

Employee Stock Options Fact Sheet

A special election was available so that the tax liability on the deferred stock option benefit would not exceed the proceeds of disposition for the optioned securities two-thirds of such proceeds for residents of Quebec , provided that the securities were disposed after and before , and that the election was filed by the due date of your income tax return for the year of the disposition. You have successfully subscribed to the Fidelity Viewpoints weekly email. Options granted under an employee stock purchase plan or an incentive stock option ISO plan are statutory stock options. But many investors get tripped up, don't pay attention to critical dates, and haphazardly manage their employee stock option grants. The exercise price is important because it is used to determine the gain, also called the bargain element, and the tax payable on the contract. If your employer grants you a statutory stock option, you generally don't include any amount in your gross income when you receive or exercise the option. Case Studies Discusses the strategic and practical issues of participant communication in a variety of types of equity plans, from ESPPs to options.

An employee stock option is a contract issued by an employer to an employee to buy a set amount of shares of company stock at a fixed price for a limited period of time. There are two broad classifications of stock options issued: non-qualified stock options (NSO) and incentive stock options (ISO).

Help Menu Mobile

However, the employee may not claim the 50 per cent deduction on the employment benefit amount at the same time unless the employer files an election to forego the deduction on the cash payment.

The above rules are even more advantageous when the employer is a Canadian-controlled private corporation CCPC , a private company that is not controlled by any non-Canadian residents or public companies. The timing of the taxation of the employment benefit is deferred to the taxation year in which the employee sells the shares, as opposed to the taxation year in which the employee acquired the shares.

The employment benefit will be calculated as discussed above. Moreover, the employee may also claim the 50 per cent offsetting deduction as long as the individual holds the shares of the CCPC for at least two years before selling them. There is no requirement that the exercise price be at least equal to the FMV at the date of grant, nor any requirement that the shares qualify as prescribed shares in order to be eligible for the deduction.

If the issuing company is not a CCPC, Bob will pay tax on the employment benefit when he exercises his options and acquires the shares in If the issuing company is a CCPC, Bob will not have to pay tax on the employment benefit until he disposes of the shares in Because Bob held the shares for more than two years after the options were exercised, he will also be able to claim a deduction equal to 50 per cent of the benefit.

If Bob had held the shares for less than two years, he would still be able to claim the 50 per cent deduction of the employment benefit since the other conditions are met i.

Larger, publicly traded companies such as Starbucks, Southwest Airlines, and Cisco now give stock options to most or all of their employees. Many non-high tech, closely held companies are joining the ranks as well. As of , the General Social Survey estimated that 7. The decline came largely as a result of changes in accounting rules and increased shareholder pressure to reduce dilution from equity awards in public companies.

What Is a Stock Option? A stock option gives an employee the right to buy a certain number of shares in the company at a fixed price for a certain number of years.

The price at which the option is provided is called the "grant" price and is usually the market price at the time the options are granted.

Employees who have been granted stock options hope that the share price will go up and that they will be able to "cash in" by exercising purchasing the stock at the lower grant price and then selling the stock at the current market price. There are two principal kinds of stock option programs, each with unique rules and tax consequences: Stock option plans can be a flexible way for companies to share ownership with employees, reward them for performance, and attract and retain a motivated staff.

For growth-oriented smaller companies, options are a great way to preserve cash while giving employees a piece of future growth. They also make sense for public firms whose benefit plans are well established, but who want to include employees in ownership. The dilutive effect of options, even when granted to most employees, is typically very small and can be offset by their potential productivity and employee retention benefits.

Options are not, however, a mechanism for existing owners to sell shares and are usually inappropriate for companies whose future growth is uncertain. They can also be less appealing in small, closely held companies that do not want to go public or be sold because they may find it difficult to create a market for the shares. When managed properly, these benefits can help pay for future college expenses, retirement, or even a vacation home. But many investors get tripped up, don't pay attention to critical dates, and haphazardly manage their employee stock option grants.

As a result, they may lose out on the many benefits these stock option plans can provide. To help ensure that you maximize your stock option benefits, avoid making these 6 common mistakes:. A stock option grant provides an opportunity to buy a predetermined number of shares of your employer's company stock at a pre-established price, known as the exercise or strike price.

Typically, there is a vesting period ranging from 1 to 4 years, and you may have up to 10 years in which to exercise your options to buy the stock. A stock option is considered "in the money" when the underyling stock is trading above the original strike price. You may be tempted to delay exercising your stock options as long as possible in the hope that the company's stock price continues to go up. Delaying will allow you to postpone any tax impact of the exchange, and could increase the gains you realize if you exercise and then sell the shares.

But stock option grants are a use-it-or-lose it proposition, which means you must exercise your options before the end of the expiration period. If you don't act in time, you forfeit your opportunity to exercise the option and buy the stock at the strike price.

When this happens, you could end up leaving money on the table, with no recourse. In some cases, in-the-money options expire worthless because employees simply forget about the deadline. In other cases, employees may plan to exercise on the last possible day, but may get distracted and therefore fail to take necessary action. Monitor your vesting schedule, keep your contact information updated, and respond to any reminders you receive from your employer or stock plan administrator.

There are 2 kinds of stock option grants: When you receive an ISO grant, there's no immediate tax effect and you do not have to pay regular income taxes when you exercise your options, although the value of the discount your employer provided and the gain may be subject to alternative minimum tax AMT.

However, when you sell shares of the stock, you'll be required to pay capital gains taxes, assuming you sold the shares at a price higher than your strike price. To qualify for the long-term capital gains rate, you must hold your shares at least 1 year from the date of the exercise and 2 years from the grant date. If you sell ISO shares before the required holding period, this is known as a disqualifying disposition.

In such a case, the difference between the fair market value of the stock at exercise the strike price and the grant price—or the entire amount of gain on the sale, if less—will be taxed as ordinary income, and any remaining gain is taxed as a capital gain. For most people, their ordinary income tax rate is higher than the long-term capital gains tax rate. While taxes are important, they should not be your sole consideration.

You also need to consider the risk that your company's stock price could decline from its current level. Consult with a tax advisor before you exercise options or sell company stock acquired through an equity compensation plan. Under most companies' stock plan rules, you will have no more than 90 days to exercise any existing stock option grants.

While you may receive a severance package that lasts 6 months or more, do not confuse the terms of that package with the expiration date on your stock option grants. If your company is acquired by a competitor or merges with another company, your vesting could be accelerated. In some cases, you might have the opportunity to immediately exercise your options.

However, be sure to check the terms of the merger or acquisition before acting. Find out if the options you own in your current company's stock will be converted to options to acquire shares in the new company. Contact HR for details on your stock option grants before you leave your employer, or if your company merges with another company.

Earning compensation in the form of company stock or options to buy company stock can be highly lucrative, especially when you work for a company whose stock price has been rising for a long time. At the same time, you should consider whether you have too much of your personal wealth tied to a single stock.

There are 2 main reasons.

What Is a Stock Option?

Jan 31,  · Employee Stock Purchase Plan - After your first transfer or sale of stock acquired by exercising an option granted under an employee stock purchase plan, you should receive from your employer a Form pdf, Transfer of Stock Acquired Through an Employee Stock Purchase Plan under Section (c). This form will report important dates and values needed to determine the correct . If the stock options are structured properly, the employee can enjoy the benefit on a tax-effective basis. Employees typically receive stock options, granting them the right to purchase shares of the employer corporation at a fixed price (the exercise price) on a future date. Mistake #5: Ignoring your company's employee stock purchase plan. Employee stock purchase plans (ESPPs) allow you to purchase your employer's stock, usually at a discount from the stock's current fair market value. These discounts typically range from 5% to 15%.