Stock options are stock options, right?
Just like ice cream is ice cream. Try telling that to Baskin Robbins which is proud of all of its thirty-one different flavors. There are two basic flavors of stock options—Non Qualified and Qualified (sometimes called incentive stock options).
Here are the differences between the types:
Non Qualified Stock Options
When you purchase/exercise Non Qualified stock options, your profit is taxed as ordinary income to you and will be reported on your W2 tax form issued by your employer. It doesn’t matter whether you actually sell the stock or hold the stock for continued investment.
If you choose to hold the stock, any future profits would be taxed as capital gains. Any losses (based upon your exercise price) would be reported as a tax loss when you actually sell the stock.
Qualified Stock Options
This flavor of stock option can be better then buying a winning lotto ticket. When you exercise your right to buy these shares, your paper profit is not taxable income to you unless and until you actually sell your shares.
This gives you an opportunity to have your profits taxed as long-term capital gains instead of ordinary income. This could translate into a 30-50% tax savings depending on your tax bracket.
Tax benefits and rules play a large role in how you should handle your stock options. Don’t overpay. Learn more in Brian Fricke’s book Worry Free Retirement. Request your free copy today.