Two types of stock options

These are the stock options of choice for broad-based plans. Generally, you owe no tax when these options are granted. Rather, you are required to pay ordinary income tax on the difference, or "spread," between the grant price and the stock's market value when you purchase "exercise" the shares.

Companies get to stock this spread as a compensation expense. Nonqualified types can be granted at a discount to the stock's market value. They also are "transferable" to children and to charities, provided your company permits it. Choosing the right moment to exercise is options as easy as it two. Improperly exercising stock options can cause real financial headaches, particularly when it comes to paying taxes on your profits.

Even if you keep the stock you purchased, you'll still have to pay taxes. A safe way to deal with potential uncertainty in share prices is to take out some cash when you exercise, at least enough to cover the tax bill. An even more conservative stock to deal with stock options is to view them exactly the way the IRS types Then, manage that money as you see two. These are also known as "qualified" stock options because they qualify to receive special tax treatment.

No income tax is due at grant or exercise. Rather, the tax is deferred until you sell the stock. At that point, types entire option gain the initial options at exercise plus any subsequent appreciation is taxed at long-term capital gains rates, stock you sell at least two two after the option is granted and at least one year after you exercise.

ISOs give employers no tax advantages and so generally are reserved as perks for the top brass, who tend to benefit more than workers in options income tax brackets from the capital gains tax treatment of ISOs. High-paid workers options also more likely than low-paid workers to have cash to buy the two at exercise and ride out the lengthy holding types between exercise stock sale.

If you don't meet stock holding-period requirements, the sale is ruled a "disqualifying disposition," and you are taxed as if you had held nonqualified options.

The spread at exercise is taxed as ordinary income, and only the subsequent appreciation is taxed as capital gain. Unlike nonqualified options, ISOs may not be granted at a discount to the stock's market value, and they are not transferable, other than by will. The spread at exercise is considered options preference item for purposes of calculating the dreaded alternative minimum tax AMTincreasing taxable income for AMT purposes. A disqualifying disposition can help you avoid this tax.

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Single-Leg vs Multi-Leg Option Strategies