Share this Page URL

Lesson 9. Taxes and Options - Pg. 42

42 Chapter 9. Taxes and Options In this lesson, you will learn some of the basics about the taxes that apply to employee stock options. Tax Warning This chapter is a general discussion about taxes and employee stock options. Please don't consider it expert advice on tax matters. I will cover the general principles that apply in most cases. However, as I am sure you are aware, the tax code is very complicated. You should always consult a tax professional with specific ques- tions about your particular tax situation. This chapter also deals strictly with stock options and unrestricted stock. If you receive stock through an employee stock option plan that has any restrictions on it, please consult a tax professional. The tax rules for restricted stock can be very different from the rules for options. Caution Special rules cover restricted stock and they are quite different from the rules governing stock options. It is possible, for instance, to use vested stock options to acquire unvested stock. I discuss stock plans in Lesson 13, "Employee Stock Purchase Plans," and Lesson 14, "Employee Stock Owner- ship Plans." For most people covered by employee stock options plans, the tax rules are relatively straightfor- ward and easy to understand. In Lesson 10, "Taxes and Your Options," I relate them directly to options. Tax Terms Not only are the tax rules complicated, they use a language that only an accountant could love. Fortunately, it's not hard to learn the few terms that are required to deal with stock options. Ordinary Income The tax code generally recognizes two types of income for individual taxpayers: ordinary income and capital gains. The simplest way to understand ordinary income is that it is everything except capital gains. Your salary, dividends, interest, and so on are all considered ordinary income. Obviously this definition doesn't address items like Roth IRA distributions, gifts, and so on. Since this book is not a tax guide, I'll pass right on by those complications and stick with how the tax code impacts options.