Employee Stock Options Guide for Startups |

Taxes on your ESPP transaction will depend on whether the sale is a qualifying disposition or not. The sale will be considered a qualifying disposition if it meets both of these criteria:. The offering date refers to the start of the offer period during which your company starts to deduct ESPP contributions from your paycheck.

The offering date is also called the grant date. The purchase date, which is when the company buys its own shares at a discounted rate on behalf of employees, marks the end of the offer period. If there are any commission or transaction costs, you can deduct this from the selling price of your ESPP share. When stock prices decline after the purchase date and the sale is a disqualifying disposition, you may end up paying taxes on a phantom income. For a disqualifying disposition, you have to pay ordinary income tax on the difference between the purchase price and the market value of the stock at the closing date, even if the stock is now worth less than you bought it for.

Not that there are instances where you may have to pay tax from your ESPP shares even if you sold the shares at a loss because you are taxed separately on the discount provided by your employer and the later stock sale. This is known as phantom income. In the next tax year, you can offset the carry forward loss with capital gains. The carry forward can go indefinitely until you exhaust the capital loss.

Had this been a qualifying disposition at least 2 years after the offering date you would not owe income taxes on your ESPP contribution or this transaction and you would only have a loss.

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Provide these forms to your tax preparer so that they can include your ESPP transactions in your taxes. Every company may have a slightly different policy for its ESPP.

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It is best to consult your HR or benefits departments for more details specific to your company. Employers are not required to withhold taxes if you sell your stocks, but you would still owe taxes on any gain on sale. If you are among the lucky few, it is a financial opportunity to build wealth in a way that is difficult with a regular salary.

However, because of their special nature Employee Stock Options require special planning. When you exercise the option and purchase the stock you are expected to make a profit.

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As you ascend in seniority, you are likely to receive more employee stock options and eventually they may form a large portion of your compensation. A long time ago when I used to receive employee stock options, a mentor instructed me that ESO were a unique opportunity for an employee to build wealth. I agree. However, employee stock options are more complicated than traditional financial instruments such as stocks, bonds, or k accounts.

Their actual value can be volatile, and the impact on your portfolio wealth uncertain if you do not plan for it. Five key steps to watch are:. Know what you have.

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Consider what kind of instrument you have. The major difference is how and when they are taxed. It is important to know what you have so you can plan accordingly. Plan for taxes. The good news is that employee stock options receive tax benefits under current Federal law. The down side is that you will eventually owe taxes. Also, through the use of vesting periods, the employee stock option provides an incentive for the employee to stay with the corporation.

No tax consequences arise when the employee receives the option; they arise when the employee exercises the option—i. The employee must account for the benefit garnered from exercising the option when computing his or her income for the year. The benefit inclusion equals the fair market value of the shares at the time the employee exercised the ESO minus the option price and any amount that the employee paid to purchase the option.

Employee Stock Options Guide for Startups

The tax year in which the employee must include the benefit depends on whether the shares under the ESO are those of a Canadian-controlled private corporation CCPC. If the ESO shares are those of a Canadian-controlled private corporation, the employee need not account for the benefit until he or she sells the shares. But if the employee-stock-option shares are those of a non-CCPC—i.

The market for shares in a Canadian-controlled private corporation is often restricted and typically smaller than that for shares in a public corporation.

So, these employees need not report the employee benefit until the year that they sell their shares and thus presumably have the cash to pay the tax. So, they must report the employee benefit and pay the resulting tax in the year that they acquired the shares under the employee stock option. Subsection 1 of the Income Tax Act allows the employee to report only half of the benefit derived from exercising the employee stock option. Subsection 1 gives two sets of criteria for the one-half benefit deduction. The first applies generally; the second places less stringent demands on employees acquiring shares of a CCPC.

For employees receiving CCPC shares, paragraph 1 d. If, under the employee stock option, the employee receives shares in a CCPC, the employee receives the one-half deduction as long as the employee held the shares for at least 2 years. The acquired shares, however, are a capital property that may give rise to a capital gain when the employee sells them.