John M. Hoffman CPA

Frequently Asked Tax Questions

Stock Options

This has to be one of the most complicated areas that we are attempting to address on our web site. As a result, this section is virtually a text book. With that in mind, we first need to divide the discussion area into the three types of stock options:

Non Qualified Stock Options (NQUAL) are also known as compensatory stock options as they result in “compensation” income (included in your W-2) when they are exercised. These kind of stock options are often offered as part of compensation packages within larger more mature companies.

Incentive Stock Options (ISO) are options that meet certain criteria. ISOs do not result in ordinary compensation income when exercised and if certain criteria are met, the gain from these options can be taxed as capital gain income. ISOs have complex Alternative Minimum Tax (AMT) implications. ISOs are often issued in start up and smaller capitalization companies.

 Stock Market Stock Options are included here for clarification. We are talking about “call” and “put” contracts on stocks and indexes, such contracts generally being transferable and readily so via stock market exchanges.

 It is critically important that you know what kind of options you own or are contemplating.

“How do I know what kind of options I have?”

“What else do I need to know?”