Tax on Sale of Stock Options

Exercising Versus Selling

• Stock options are agreements between a company and employees to allow employees to purchase company stock below market price. When an employee exchanges the option for discounted company stock, they are exercising their options. Employees then have the option to sell the stock on the market or keep the stock.
  
  

Exercising Tax

• The IRS considers stock options -- the contractual agreement to give the employee a perk -- to be an employee benefit and hence subject to income tax. However, since the actual agreement has no monetary value, the IRS taxes the difference between the option price and the market price when the employee exercises the option. The difference is taxed at the employee's income tax rate.
  
  

Capital Gains

• Once the employee has company stock in hand, the employee has an investment and the sale of that investment is considered a capital gain if the employee realizes a profit, and a capital loss if the employee realizes a loss when they sell the stock. The IRS differentiates between short-term capital gains (bought and sold in less than 365 days) and long-term capital gains for tax purposes.
  
  

Sale Tax

• The IRS taxes short-term capital gains at the employee's income tax rate. However, if the employee keeps the stock in their portfolio for more than a year before selling, the IRS charges the discounted long-term capital gains rate, which for the majority of taxpayers is 15 percent.