It is? I'm pretty ignorant with stocks so please excuse the stupid questions but I thought you weren't taxed until after selling them. Is that not the case? How does it work?
If you exercise stock options, you get taxed on the difference between the strike price and the market value at the time you exercise, as normal income (not capital gains).
This can be a big problem if you exercise stock options, then the price of the stock drops. You might not be able to sell the stock for enough to pay the taxes you owe, and although you can take a capital loss, you can't use capital losses to offset normal income (beyond a fairly small limit each year).
The same is true if you are given actual stock. You owe taxes when it vests (or hypothetically when you are given it if it is unrestricted stock) not when you sell it.
That just moves the point where you have to lay out money to even earlier. That's great if it's an early stage startup where the shares are worth practically nothing, but it's even worse if they are already worth a lot.
Oh sure; but you won't have to lay down any money until you sell your stock; and paying taxes on real money is a lot easier than paying taxes on imaginary money.
That's only true for NQ options. With ISO options you aren't taxed until you actually sell the shares they covert to, and then as a capital gain tax, not as ordinary income.
That's not true, the ISO option spread at exercise is taxed via AMT [1]. In general you shouldn't give out tax advice, and if you do at least make sure you have your facts straight. Plenty of early employees have been bitten by this rule and it doesn't that people perpetuate incorrect information.
That's only true when the value of your options is pretty small. ISOs are taxed under the AMT plan as regular income at a rate of 26-28%, and so you might be forced to pay taxes on them anyways.
Source: I had a fat AMT tax bill precisely because of this. :/
The taxation structures around stock options in the United States appear extremely complex. Google for something like "taxation of stock options in private company"...
I'm certainly not an expert, so don't listen to me for any financial or legal advice.
When you receive something of value from your employer, it generally counts as taxable income. This includes grants of stock or other perks such as a housing allowance or a car.
Like most Bay Area tech workers, I'm compensated partially in stock. Every month, X shares of my restricted stock "vest", which means, in practical terms, that I receive those shares. That counts as taxable income at the current market value of those shares. To avoid making me pay a large tax bill come April, my employer actually withholds some of those shares of stock to cover the tax bill.
(I've never been entirely sure how this stock-withholding works from a tax perspective. Do they immediately sell those shares and pay the proceeds to the government along with the rest of my income tax withholding?)
> To avoid making me pay a large tax bill come April, my employer actually withholds some of those shares of stock to cover the tax bill.
I think that your employer actually sells just enough of those shares at the time of vesting to cover the taxes. Any cash remaining difference is given to you in your next paycheck (i.e. 2 shares at $100 ea. are sold to cover $120 of taxes, and $80 is given to you). Could be wrong though.
You also get taxed when exercising options even if you don't immediately sell the shares you just bought. Something like the difference between the strike price and the current value being treated as income you earn upon exercising the options, so it's taxable.
This can be a big problem if you exercise stock options, then the price of the stock drops. You might not be able to sell the stock for enough to pay the taxes you owe, and although you can take a capital loss, you can't use capital losses to offset normal income (beyond a fairly small limit each year).