How To Report Employee Stock Options

What are Employee Stock Options or ESOs? In simplest terms, they refer to employees’ rights to buy the stocks of the company that they are working for. This definitely helps in increasing the employees’ annual salaries, plus this is a way for them to be more motivated towards helping make the company more successful. These ESOs are non-transferable, and they are forfeited once the employee leaves the company.

  • Know of different possible options. Different companies offer ESOs in different ways. For example, some companies offer ESOs after the employees have been with the company for a certain number of years in order to encourage employees to stay with the company longer, while some companies opt to offer ESOs right at the onset as a sign-up bonus. If you are an employee about to sign up for a company, know about this ESO right away since it will has high potentials for you to increase your benefits from the company.
  • Know the two different types of ESOs. ESOs can be divided into two categories: Incentive Stock Options (ISOs) and Non-statutory Stock Options (NSOs). The main difference between these two has something to do with taxability: ISOs can be taxed under long-term capital gains, while NSOs are taxed as income and capital gains. Again, it’s important that you are aware of the type of ESO that you are signing up for.
  • If you have an ISO, do know that you don’t have to include this to your gross income when you file a tax return, but you may be subject to an Alternative Minimum Tax during the year that you exercise your ISO. When you do sell your ISO, the income you derive from this is subject to tax.
  • Know how to compute for total gain/ loss from your ESO. To do this, simply subtract the amount you paid for the ESO from the amount you gained from the sale (also termed as the exercise) of the stock. In case the difference is positive, it is a gain; negative, then it is a loss.
  • Know how long you have held on to the ESO. If you have had the ESO for less than a year before you exercised it, it is considered a short-term gain and you should report it as one in your IRS Form Schedule D (you could download the form from the IRS website or get it from your nearest local legislative office). If you have had the ESO for more than one year, then report it as long-term gain.

If you had capital loss from your ESO, you must also report it as such. There are portions available at the schedule D form where you will write down losses from your investments.

These are just some of the basic guidelines to remember when you are reporting your employee stock options or ESOs. If you have some additional questions about this topic you may want to consult with personnel from your HR and Payroll Department. You should also be careful about managing your records so that you will be able to create and submit your reports once tax filing season comes around. Good luck, and hope this helped you out!


Share this article!

Follow us!

Find more helpful articles: