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Exercising Stock Options and Receiving/Selling RSUs
Some information about what they are and how the taxes work
Stock Options
What are they?
Options are essentially a fixed price stock option. If you had 100 options to buy Google stock at $10, when you exercised it, you’d only pay $1000 dollars to acquire the stock, even if the stock itself was worth $93.65 as it is today. We’ll get to the importance of that difference later.
Options can be granted before the stock is public (Initial Public Offering, or IPO). If you exercise options pre-IPO, they are kind of in limbo, since you won’t be able to trade them on the open market. Post IPO, exercised options represent stock that can be traded.
How are they taxed?
Options are kind of strange tax-wise, because you do pay for something, so it’s not exactly income. The primary piece that is taxable is when you do eventually sell the stock itself, and depending on the holding period. See the tax section for RSUs below, since it’ll essentially be the same.
What can happen when you exercise a share, and the Fair Market Value (FMV) of the option is much higher than the strike/option price, then it might affect the tax you pay by changing your Alternative Minimum Tax. A lot of websites…
