Tax planning and compliance for investors
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What you need to know about your ISOs when you receive them.
Generally you have nothing to report in connection with an incentive stock option prior to exercise. There are a few points you should be aware of nonetheless.
There's no tax to pay, and nothing to report, at the time you receive an incentive stock option. You should, however, take care to do the following:
You may receive an option that isn't immediately exercisable. You're permitted to exercise the option only if you continue to work for the same company for a stated period.
Example: You receive an option to buy 300 shares of your employer's stock, but you're not permitted to exercise the option immediately. If you're still employed with that company a year later you become eligible to exercise half of this option. After another year of employment the option is fully exercisable.
The dates on which the option becomes exercisable are called the vesting dates. These dates are obviously significant, but you don't report income on these dates.
Note: The rule is different when you receive grants of stock from your employer. As a general rule, you do report income when a stock grant vests. But there's nothing to report on your income tax return when an option grant vests.
For one reason or another your employer may consider changing the terms of an incentive stock option you hold. Some types of changes are OK, but others can turn your ISO into a nonqualified option. Be sure that a qualified tax expert has reviewed this question before accepting any changes in your ISOs.
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