Your Tax Bill Will Depend on Type of Options

There are two basic types of options: non-qualified stock options, typically issued to workers, and incentive stock options, which are usually offered to executives. Non-qualified options are taxed sooner and at higher rates than incentive options, but incentive options can trigger the dreaded alternative minimum tax.

With non-qualified options, you owe regular income tax on the difference between the price you paid for the stock and its fair market value as soon as you purchase the shares, even if you don’t sell the stock right away.

With incentive options, no regular income tax is due when you purchase the shares and the gain can be taxed at favorable capital gains rates if you hold the shares at least a year after purchase (and two years from the day the options were granted).

However, you may owe alternative minimum tax in the year you purchase your shares, particularly if you scored a large paper profit. The AMT is a parallel tax system that has two tax rates, 26% and 28%, and allows far fewer deductions than the regular income tax system.

For more on the tax treatment of options, see the special report at https://www.latimes.com/taxes.