More and more companies, especially startups and tech firms, offer stock options or share awards as part of their employees' pay. Their tax treatment has important particularities worth understanding before accepting this type of compensation.
What stock options are
They're options a company grants an employee to buy company shares in the future, at a price set in advance (the exercise price), regardless of the share's market value at the time you decide to exercise that option. If the company's value rises, the difference between the exercise price and the market value at that point is a gain for the employee.
When taxation is triggered: it's not when you receive the option
Taxation isn't triggered when you're granted the stock options, but when you exercise the option (buy the shares at the agreed price). At that point, the difference between the share's market value and the exercise price paid is treated as pay in kind, subject to taxation as employment income.
The partial exemption available
The rules provide for an exemption on part of this pay in kind, up to a set annual limit, as long as certain requirements are met (such as the offer being made under the same conditions to all employees of the company, among other nuances depending on the specific type of plan). Above that limit, the excess is taxed normally.
What happens when you later sell the shares
Besides the taxation at the time of exercise (as pay in kind), if you later sell the shares you obtained for a price higher than their value at the time of exercise, a second taxable event arises: a capital gain on that additional difference, within the savings tax base of your income tax return, separate from and independent of the earlier taxation as employment income.
The specific regime for startups (emerging companies)
Legislation to support the entrepreneurial ecosystem has, in recent years, introduced a more favorable specific regime for share or stock-option awards at emerging companies, with a higher exemption limit and, in certain cases, the option to defer taxation until a later point (for example, until the shares become liquid), instead of being taxed at the time of exercise.
Why it's worth planning before exercising the options
Since exercising the options creates an immediate tax obligation (even if you haven't sold the shares or have no cash from that sale), it's worth planning ahead for how you'll cover that tax payment, especially if the shares aren't easily sellable at that point (unlisted companies).
Compare the effect on your income tax withholding
Our income tax calculator lets you estimate how additional income (like that generated when you exercise your stock options) would affect your effective rate and total withholding for the corresponding year.