Employee Stock Options - Non-Qualified Stock Options


Background

  • A non-qualified stock option (NQSO) is any option other than an incentive stock option.
  • Non-qualified stock options have greater flexibility than incentive stock options in a number of ways.
    1. Shareholders approval is not required.
    2. There is far greater flexibility for the employer to grant the options as to terms of the grant, vesting and period over which they may be exercised (e.g. no limits on the annual value of the grant or any requirement that the option be out of the money at the grant date).
    3. There is greater flexibility as to whom the option may be granted: an employee, independent contractor as well as any family members of the foregoing.
    4. There are more transferability options for holders of NQSOs.

Tax Implications

  • Grant - no taxable event is triggered when options are granted as the strike price and market price are nearly identical.
  • Exercise - to the extent that the option is in the money, that amount is deemed W-2 income and subject to payroll tax.
  • Basis - after exercise, the strike price plus the in-the-money amount serve as the basis in the shares for the computation of any capital gains.
  • Sale (disposition) - there are two options here:
    1. The sale of shares results in a capital gain/loss, depending upon whether or not the option is in the money.
    2. The holding period determines whether the capital gain is long- or short-term.
Transferability of NQSOs


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