What to do with non qualified stock options

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Why Fidelity. What is the difference between a stock option plan and stock purchase plan? Do stock options expire? How does vesting affect when I can exercise my options? Can I use an option more than once? Do options pay dividends? What happens to your stock options if you leave your employer?

What is the fair market value of an option? What are blackout dates and when are they used? I just executed an exercise and sell of my stock options, when does the trade settle?

How do I get the proceeds of my stock option sale? How do I use the Fidelity Account? Are there tax implications when stock options are exercised? Why are the results of this transaction reflected both on my W-2 and on a Form B? What is a disqualifying disposition? What is the alternative minimum tax AMT? How do I pay the taxes when I initiate an exercise-and-sell transaction? How do I sell shares in my account that are not part of my option plan? How do I view the different share lots in my Fidelity Account? How can I determine what the tax implication may be if I sold my shares?

How do I select a specific share lot when selling company stock? A stock option gives an employee the right to purchase stock at a predetermined price, regardless of the fair market value of the stock. A stock purchase option, available through an Employee Stock Purchase Plan, gives an employee the right to purchase company stock, sometimes at a predetermined discount from the fair market price.

Although the plans are similar, they are not the same.

Both kinds of plans can be either qualified for special tax treatment or unqualified. Both can be of great benefit to employees.

Both can be offered to an exclusive group of participants as in the case of non-qualified Employee Stock Purchase Plans, or to all full-time employees under qualified plans. Top Q. Stock options do expire. The expiration period varies from plan to plan.

There are often special rules for terminated and retired employees, and employees who have died. These life events may accelerate the expiration. Check your plan rules for details about expiration dates. Your plan may have a vesting period that affects the time you have to exercise your options. A vesting period is time during the term of the option grant that you have to wait until you are allowed to exercise your options. This essentially means you have an eight-year time frame during which you can exercise your options. This is called the exercise period.

Generally, during the exercise period, you can decide how many options to exercise at a time and when to exercise them. A stock option just gives you the right to purchase the underlying shares represented by the option for a future period of time at a pre-established price. Once a stock option has been exercised, it cannot be used again. Dividends are not paid on unexercised stock options. There are usually special rules in the event you leave your employer, retire, or die.

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The fair market value is the price used for calculating your taxable gain and withholding taxes for non-qualified stock options NSO or the alternative minimum tax for Incentive Stock Options ISO. It spells out the terms under which the company is willing to sell its stock to you. The price you can buy stock is known as the exercise price or strike price. Once your option period ends, typically after 10 years or when you leave the company, your option loses its value and is worth nothing. Your option may have a short grace period after you terminate employment during which you can exercise your option.

You then pay the exercise price for the number of shares you buy. Your stock option gives you the right but not the obligation to buy shares of the company stock. Stock options are normally subject to vesting provisions designed to encourage employees to stay with the company. Vesting means you may exercise your option only after you have worked for the company the required time.

Vesting then continues monthly. As you vest, you gain the right to buy a number of shares proportional to vesting completed. Once you exercise your option and buy shares typically after they have vested , you can hold the shares or you can sell them.

Selling the shares typically requires that the shares be tradable on a public stock exchange, such as after a startup company has had its initial public offering IPO of stock or as with a mature company whose stock has been trading publicly for many years. Under some circumstances, you may be able to sell shares of private company stock. You will owe income tax once you exercise your non-qualified stock option.

For this reason, many option holders sell at least enough shares when they exercise their options to pay the tax owed. Another common approach is a same-day exercise and sale, in which all exercised shares are sold immediately once they are purchased. Once you exercise your non-qualified stock option, the difference between the stock price and the strike price is taxed as ordinary income. This income is usually reported on your paystub.

There are no tax consequences when you first receive your non-qualified stock option, only when you exercise your option. Also, while there are no direct alternative minimum tax AMT consequences to exercising a non-qualified stock option as there are for ISOs , higher reported income may subject you to AMT.

When you exercise your option and buy shares, your cost basis in those shares is the stock price on the day you exercised. When you later sell your shares, taxation follows the normal rules for gains and losses on investments. If you hold the shares for one year or more, any gain is taxed at the favorable long-term capital gains rates.