Exercising stock options and tax, a returning subject, not always well understood. How is that taxed?
Exercising stock options and tax
The stock options is experienced as something special, exotic almost, very much appreciated. The stock option is granted to you based on the fact that you have an employment relation with the company. As a reward for your effort you are awarded stock options. Looking at the stock option from a tax point of view, it is simply a fancy name for salary. All you receive from your employer is taxed as salary.
How is the stock option taxed?
You work in a company and you are awarded the right to purchase a share for EUR 10 under the condition that you are still employed by that company. In other words, it works both ways. You may get a benefit and the employer is able to keep you with the company till then.
The moment the share is worth EUR 5, you are not going to exercise paying EUR 10 for getting a EUR 5 value. However, the moment the value of the share exceeds EUR 10, it starts getting interesting. Assume the value is EUR 30. Then you are entitled to purchase for EUR 10 a share with a value of EUR 30.
The main rule is that all you earn with your employer is taxed, hence this advantage is taxed. If you actually paid EUR 10 for the option, the advantage is EUR 20 in this example. If you paid nothing, which happens often, the taxable advantage is EUR 30.
Where is the stock option taxed?
The exercised stock option is taxed in the country where you worked at the time and the options were granted to you. Example, you worked in the USA, options were granted, then you worked for the US company in Sweden and more options were granted. The option organization is located at the Cayman Islands.
While you worked in the USA, your salary was taxed in the USA. The options issued to you during that period, if exercised now, are taxed in the USA. Regardless where you are a tax resident now, this income is taxed in the USA.
The options granted during your Swedish period, the exercised profit is taxed in Sweden. The fact that the employer is an USA company is irrelevant and that the option organization is located in the Cayman Island, does not impact your taxation.
Who is in charge of the correct tax collection?
We do receive weekly a number of employees who are concerned where the result of the stock options are to be taxed. We can understand that worry if you are moving around the world. Then again, it is not the individual employee who is in charge of taxation. It is the employer.
The employer that facilitates the exercise of the stock options is to know where the result is taxed, how it is taxed and what amount of tax should be collected. It is not a choice of the employee.
“I read that in the Netherlands you can delay the taxation”
Indeed correct. Under special circumstances you can delay the taxation. The special circumstance is that your company is going to exercise an Initial Public Offering (IPO) on the stock exchange. That could have a positive impact on the share value.
However, till the moment of IPO the company could demand nothing is sold, as that might have a bad impact on potential investors. If the employees are all dumping their shares, something must be off. At the same time when the employee did exercise their options and have to pay 49,5% Dutch tax over the result, this can only be paid if the shares are actually sold. And the company does not want that. How to pay the tax? Exactly that was the problem and for that situation the tax office created a delay in payment till the IPO was concluded.
This implies that in regular situations no delay is possible. The employer is in charge of collecting the tax, neither is the employer interested in a delay to meet their obligations.
Tax status after exercising stock options
The moment you exercise the stock option, you took the opportunity to purchase shares at the lower value. The advantage is instantly taxed as salary. Now you hold the shares. The shares are now part of your worldwide assets and if you did not sell all of them, the remaining you kept are an assets. Assets are taxed in Box 3. The moment you sell these shares the gain will be tax free. Currently (2023) we still do not know the concept of capital gain tax.
Tax is exciting
We think tax is exciting and you have an awesome employer that grants you stock options. As this granting is a result of the employment, the gain is taxed as salary. Salary is taxed in the country where the job was done and the stock options follow that line.