Stock Options
April 15, 2018
I was working at the Canadian branch of a US tech company and part of my compensation was in the form of stock options so I was curious in understanding how they were taxed.
Taxes on stock options are calculated based on the delta between Excercise Price and Strike Price. 50 % of the delta is taxed as income Stock Option Deduction. So, they are taxed at the same rate as capital gains.
However, they are not treated as capital gains. If the excercised shares are held and sold at a later date for a price lower than the Excercise Price the loses are counted under Capital Gains and therefore may not be used to offset Income from Excercising
If the brokerage that is holding your options withholds taxes on exercising (this was the case for me), they’ll likely be conservative and withold taxes assuming the maximum rate ~54%. The potential downside depending on your income bracket and your actual marginal tax rate, you’ll loose the utility of the excess taxed amount until you file your taxes and get the money back. The upside is you’ll never end up owing a sizeable sum to the government at tax filing time.
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