Frequently Asked Questions

As a general rule, you will be subject to ordinary income tax on the bargain element when you exercise non-qualified options. This amount is often included in your w-2 at year end.

Paying the tax may happen one of sevearl ways. First, companies will often withhold a statutory tax due at exercise. This is generally 22% for federal income tax, plus requisite Social Security, Medicare, and State tax (if any).

This 22% may or may not be enough, subject to your total taxable income at year end. If it is not enough, you may owe additional tax due when you file your tax return. One way to avoid this is to perform tax planning throughout the year, and make estimated tax payments if necessary.

Some companies will offer an early exercise provision on their NQSOs. This allows you to exercise your NQSO prior to the shares vesting.

If allowed an early exercise, the 83(b) election of non-qualified stock options allows you to exercise and pay tax on your pre-vested NQSOs. When you exercise your NQSO, you’re taxed on the spread between the strike price of the NQSO and the FMV at exercise.

An early exercise and an 83(b) election is a tax planning strategy that is often considered for pre-IPO and low cost options. Assumin the cost of the options is small and the spread between the strike price and the FMV is small, the total cost (cash to buy plus potential tax due) is palatable. By exercising and holding early and filing the 83(b) election, you can begin the holding period, and attempt to convert what might be ordinary income to long-term capital gains.

NQSOs are not taxed when they are granted. An NQSO grant means your company gives you the right (or option) to buy a set number of stock shares at a set price for a period of time. When your NQSOs vest, there is once again no taxable event. A taxable event occurs when you exercise your NQSO. Only once you exercise your options do you become an actual company stock shareholder. At exercise, you’ll incur taxes at ordinary income tax rates on the value of the transaction.