US company stock options - tax implications & more...

david555_2

Afternoon all,

I work for a pre-IPO US company and as part of my package I was given an amount of stock options. For the sake of argument let's say I've been given 100 options vesting over 4 years and I'm over a year into that scheme. After 12 months 25% have vested and can be exercised and bought by me. The rest vests pro-rata for the remaining 3 years.

Stock was made available to me at a price of $1 (this is an example) and now today has a fair market value of $10 (again, an example).

I've bought my currently vested stock at the price of $1 with my own money - as have all other eligible UK employees. As I understand it this will help save on overall tax for this allocation of options and be subject to capital gains once sold rather than the near 60% tax we'd face instead.

My question concerns what the stock means to me now, bought and owned by me but unsold. The company has not become public yet and remains a private company at least for the moment.

One person in the team has suggested that the exercised stock I now own will be taxed as an asset and I have to declare it and of course pay tax on it in next years tax return (or via PAYE).

This is quite a rabbit warren so I'd welcome so black and white advice and perspective.


David

david555_2

Worth adding that the stock options are currently non-qualified.

EdSwippet

In my experience what happens is described reasonably well in this article. Synopsis: No tax liability on grant, and none until exercise. On exercise, normal(*) income tax and NI payable on the difference in price between grant and exercise. On later sale, capital gains tax on the difference in price between exercise and sale.

The wrinkle in your case would be valuation of stock in a non-public company -- no idea what difference this makes, sorry. I guess the valuation comes from somewhere, but where stock isn't tradeable its value is often arguable.

(*) One extra kick in the pants is that on exercise the company is able to pass employer's NI on to employees. This makes the tax/NI hit worse. A 40% taxpayer loses a 13.8 + 2 + 40 x (1 - 0.138) = 50.28% combined tax and NI liability. A 60% taxpayer loses a wince-inducing 67.52%.