Stock Options

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If you are granted a statutory stock option under an employee stock purchase plan or an employee incentive stock option (ISO) plan, you generally do not include any amount in your gross income as a result of the grant or exercise of your option. However, you may be subject to Alternative Minimum Tax in the year you exercise an ISO. For more information, refer to the Form 6251 Instructions.

You have taxable income or deductible loss when you sell the stock you received by exercising the option. You generally treat this amount as a capital gain or loss. However, if you do not meet special holding period requirements, you will have to treat income from the sale as ordinary income. Refer to Publication 525, Taxable and Nontaxable Income, for specific details on the type of stock option, rules for when income is reported and how income is reported for income tax purposes.

If you are granted a nonstatutory stock option, the amount of income to include and the time to include it depends on whether the fair market value of the option can be readily determined and whether your rights in the stock are vested when you receive it. For most nonstatutory options, there is no taxable event when the option is granted and the fair market value of the stock received on exercise, less the amount paid, is included in income when the option is exercised. For specific information and reporting requirements, refer to Publication 525.


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