What are the tax implications of equity compensation?

What are the tax implications of equity compensation?

Equity compensation can have various tax implications depending on the type of equity you receive, such as stock options or restricted stock units (RSUs). Generally, you may owe taxes when you exercise options or when RSUs vest.

Can you explain how stock options are taxed?

Sure! When you exercise stock options, you may have to pay ordinary income tax on the difference between the exercise price and the fair market value at the time of exercise. If you hold the shares after exercising, any further gains may be taxed as capital gains.

What about restricted stock units?

For RSUs, you typically pay taxes when the shares vest. The value of the shares at vesting is considered ordinary income, and you may also owe capital gains tax if you sell the shares later.

Are there any strategies to minimize taxes on equity compensation?

Yes, some strategies include holding onto shares for a longer period to benefit from lower capital gains tax rates, or utilizing tax-advantaged accounts like IRAs for investments.