What are the tax implications of options?

What are the tax implications of stock options?

The tax implications of stock options can vary based on whether they are incentive stock options (ISOs) or non-qualified stock options (NSOs). ISOs may qualify for favorable tax treatment, while NSOs are typically taxed as ordinary income.

How are ISOs taxed when I exercise them?

When you exercise ISOs, you generally do not owe any regular income tax at that time. However, the difference between the exercise price and the fair market value of the stock may be subject to the Alternative Minimum Tax (AMT).

What about NSOs? How are they taxed?

NSOs are taxed as ordinary income at the time of exercise. The amount taxed is the difference between the exercise price and the fair market value of the stock.

Are there any reporting requirements for these options?

Yes, both ISOs and NSOs have specific reporting requirements. You must report the income from NSOs on your tax return, and for ISOs, you may need to file Form 3921 to report the exercise of the options.