Taxation Of Stock Options

Stock options are an important incentive to employers that wish to recruit employees. Some stock options are incredibly important to contractors and freelancers because companies can allow them to purchase them as well even though they are not typically full- or part-time "employees" employed directly with the company--these stock options are called nonstatutory stock options, or nonqualified stock options (NSOs). With certain stock options, employees that are eligible do not pay taxes on the options until after the shares are sold. In essence, a stock option is the right to purchase company shares from an employer for a certain price and only at a certain time. Sometimes these stock options can be unconditional (as in nonstatutory stock options), but most are conditional. It is imperative to know whether your stock options are nonstatutory stock options or incentive stock options (ISOs). For the most part, these stock options are given to the employee by the employer based upon the employee's job performance, like an award for a job well done. They also further the belief that that particular employee will be able to share in the future growth of the company. As an employee owning stock options, it is an important idea to check with your employer about your specific stock options. While encompassing stock option taxation knowledge exists, it is crucial to find out the specifics to your investment. However, it is an underlying principle of stock options that those particular stock options that an employee purchases can be taxed once and only once--it is not subject to repeated taxation under any circumstances for the most part. Stock option taxation will vary depending on whether or not that particular stock option is bought at fair market value. It may also vary if an employer chooses not to provide an employee with company shares at a stated price and for a particular set period of time. The value of options (and therefore their taxation) varies and fluctuates rather frequently, and options should be given over an extended amount of time. By not doing so, it becomes less of a benefit to the employee and more of a hindrance.

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