The Tax Implications of Non-Qualified Stock Options
If you've been offered Non-Qualified Stock Options as part of your compensation package, you probably have a lot of questions about if, when and how to exercise them. NSO's can be a powerful investment tool, because they allow you to purchase stock in your company at a discount but they also come with risk and potentially significant tax consequences. Before we begin, if you're new to NSO's, you might want to review our Employee Stock Option Primer.
The benefit is clear. You get the opportunity to buy stock at a fixed price that is lower than market value. This provides instant growth in your investment. Since NSO's are not tax-advantaged, however, it is important to consider the tax ramifications of utilizing them.
You Won't Be Taxed on the Grant Date
Since all you actually own on the grant date is the option to purchase stock down the road, there isn't any income yet to tax. You are just being granted an option that, in most cases, won't be vested yet. And, even once fully vested there, you have still not reached a taxable event. The first taxable event comes when you exercise your options to purchase...