All Things Equity Compensation and Employee Stock Options
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In depth, digestible articles that help you make sense of your incentive stock options, non qualified stock options, restricted stock, other equity compensation, and more
If your employer has granted you incentive stock options (ISOs), you’ve likely spent time researching the tax treatment. If so, you’ve probably read about the alternative minimum tax (AMT), and qualifying and disqualifying dispositions. Perhaps the complication has left you wondering: What does this mean to me as a taxpayer?
If you’re wondering how to maximize the value of your incentive stock options (ISOs), non-qualified stock options (NQSOs), restricted stock units (RSUs), or other forms of equity compensation, you’re not alone. After all, there is plenty to think about if you’ve been granted equity compensation. You may dream of how to strike it rich. You may fear you’ll do something wrong and miss out. You might become mired in taxing technicalities, including AMT calculations. All that thinking can backfire if “TMI” (too much information) prevents you from proceeding.
Employee stock options and restricted stock units are collectively discussed under the umbrella of equity compensation. As equity compensation, they have some similarities. Yet they also have a lot of differences. It is these differences that are reviewed and highlighted in this article.
Non-qualified stock options and incentive stock options are the two types of employee stock options that you may receive as part of your compensation package. While they have some similarities, they also differ, particularly when speaking to how they may be taxed at exercise and upon the final sale of stock.
Wouldn’t it be great if your company stock price only ever went up—especially if you’re participating in its growth through incentive stock options (ISOs)? Unfortunately, that’s not always how the world turns. If the share price goes down instead, you may be bummed to see the value of your incentive stock options is less than what it once was. However, a down stock price might mean that you could score some tax breaks if you exercise and hold some of those ISOs. When the price is down, the move might help minimize alternative minimum tax (AMT).
To achieve this win-win ideal, it’s important to be deliberate about which equity compensation share lots you donate, as well as whether you donate them as post-sale cash proceeds, or unsold shares. We concluded that cash isn’t necessarily king when donating to a DAF. Directly donating low basis, long-term shares usually reigns supreme.
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