Employee Stock Options
Chapters in this video
- 0:00 The Connie and Ethan tax mystery
- 1:02 Spread and bargain element defined
- 1:53 NQSOs: who qualifies and exercise tax
- 3:25 Why companies prefer NQSOs: the deduction
- 3:47 ISO rules: $100,000 limit and 10-year term
- 5:21 ISO holding periods and disqualifying disposition
- 6:11 The AMT ambush at ISO exercise
- 7:05 Side-by-side ISO versus NQSO comparison
- 7:44 Rapid-fire exam recap
What this video covers
- Why Connie the Contractor and Ethan the Employee owe completely different taxes at exercise, even with the same strike price and spread
- How nonqualified stock options (NQSOs) work: grant, exercise, sale, and why the spread is taxed as ordinary income immediately at exercise
- Who qualifies for incentive stock options (ISOs), the strict employee-only rule, and why consultants or board members can never receive them
- The ISO holding requirements for a qualifying disposition: two years from grant date plus one year from exercise date, and what triggers a disqualifying disposition
- Why the ISO $100,000 annual vesting limit is based on grant date fair market value (FMV), and where excess shares become NQSOs
- How the alternative minimum tax (AMT) ambush works: ISO spread is a regular income tax preference item even though no regular tax is due at exercise
- Why the employer gets a tax deduction for NQSO exercise but no deduction for ISO qualifying dispositions, and which option type benefits the company versus the employee
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