As explained before, our main function is to provide tax and business research-planning services to tax professionals; this free newsletter is the "hook," so to speak, to get you to use our service. Recently, one of our clients needed a primer on Incentive Stock Options ISOs versus Non-Statutory Stock Options NSSOs.

ISOs are relatively new compared with NSSOs, but we'll begin with NSSOs since the basic IRS guidance, Reg. This newsletter covers the basics of NSSOs and is not meant to explore all the nuances of this area.

Stock Plan Resource Center | pupuzifecose.web.fc2.com

For a much more detailed and technical analysis of these two types of stock options, click here. Rather than issue the stock outright, the employees are given a contractual right to buy Blue, Inc. This right, or option, is deemed "property" received for services and may be taxable income to Zed, our hypothetical employee, either when received or at some future time.

Here, we are assuming that the option, the right to buy stock, or the stock itself, could be subject to a restriction or forfeiture if Zed leaves Blue, Inc. Thus, what Zed receives is not fully "vested" until the four-year period expires. Simply getting a stock option is usually not a taxable event unless the option has a "readily ascertainable" fair market value RAFMV. Typically, only options that are separately traded on established markets have a RAFMV and are subject to taxation as income when received.

Options here, the right to buy stock and the stock itself, received in exchange for services, are commonly subject to taxation when the restrictions, if any, lapse. Thus, the receipt of stock or other property for services is not taxable if there are substantial restrictions on transfer or the property is subject to a substantial risk of forfeiture.

Options are taxed when unrestricted property rights vest or when the restrictions on the enjoyment of the property lapse. Keep in mind that the option as opposed to the stock it may eventually allow one to buy has a value independent of the stock. The difference between Zed's option price and the FMV of the Blue, Inc. Suppose that, in , Zed is given an option to purchase stock in Blue, Inc.

If the option itself has no RAFMV, the grant of the option will not be taxable. If the stock is subject to substantial restrictions, then there will be no taxation until the restrictions lapse. If Zed holds his restricted Blue, Inc.

Is there a way for Zed to reduce his ordinary income tax? Zed can elect, under IRS Code Sec.

Nonqualified or Nonstatutory Stock Options | Startup Law Blog

The advantage of the election is that if Zed sells the Blue, Inc. Thus, by electing earlier taxation of the ordinary income portion, Zed can convert a portion of what would otherwise be ordinary income into capital gain. This works well when the value of the stock increases.

If the value of Blue, Inc. Remember, this treatment relates to NSSOs.

Stock Index Options - SPX-RUT-MSCI-FTSE

ISOs are different and will be covered in the next issue. Previous Article Next Article.

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Volume 12 Issue 3.