Guide to non-statutory stock options (NSOs) (2024)

FAQs

Guide to non-statutory stock options (NSOs)? ›

NSOs are typically used by more mature companies for higher-paid employees. These stock options are also given to contractors, consultants and other non-employees if companies want to give them more than $100,000 worth of stock annually.

NSOs are considered a type of ordinary income that you receive from your company. You are taxed on the day you exercise the non-statutory stock options on the difference between the grant price and the stock's fair market value. Generally, this will appear on your W-2, just as any other form of compensation would.

If you exercise the nonstatutory option, you must include the fair market value of the stock when you acquired it, less any amount you paid for the stock. When you sell the stock, you report capital gains or losses for the difference between your tax basis and what you received on the sale.

When Should You Exercise Non-Qualified Stock Options? The best time to exercise a non-qualified stock option is when the share value is higher than the cost of exercising the option, but before the option expires. This should ensure that the stock is more valuable than the cost of buying it.

Nonstatutory stock options rarely are subject to tax on the date of grant, and taxation at grant typically occurs only if an option is actively traded on an established securities market on that date or, if not so traded, it has a readily ascertainable fair market value.

ISOs, in contrast, receive more favourable tax treatment, as they are not subject to income tax when exercised. Instead, ISOs are only subject to capital gains tax when the underlying stock is sold, which can lead to significant tax savings for employees.

Options granted under an employee stock purchase plan or an incentive stock option (ISO) plan are statutory stock options. Stock options that are granted neither under an employee stock purchase plan nor an ISO plan are nonstatutory stock options.

Taxes for non-qualified stock options (NSOs)

When you exercise an NSO, any spread between the FMV on the date you exercise and the price you are paying for the stock is considered ordinary income to you. Your company will usually withhold ordinary income tax (including federal, payroll and any applicable state taxes).

They can only report the unadjusted basis, or what the employee paid for the stock. To avoid double taxation, the employee must make an adjustment on Form 8949. Warning: Do not use the box labeled “1g Adjustments” on Form 1099-B to make this adjustment; that is for something else entirely.

"Code V—Income from the exercise of nonstatutory stock option(s). Show the spread (that is, the fair market value of stock over the exercise price of option(s) granted to your employee with respect to that stock) from your employee's (or former employee's) exercise of nonstatutory stock option(s).

Why are NSOs taxed twice? ›

NSOs are taxed when you exercise them, and then later when you make money with them (when your company exits and you sell your shares). They don't get taxed either when the company first grants you them, or when they vest. Assuming that the company you work for: Keeps growing (so its 409A valuation increases over time)

If the company knows that an employee will immediately early exercise her options, it makes more sense to grant the employee her option as an NSO so as to avoid a special two-year ISO holding period requirement.

Since NSOs typically expire after 10 years, this means you'll usually want to exercise and sell them in their ninth or tenth year. This rule of thumb assumes two things. It assumes your company is publicly traded, and you plan to stay there through the end of the expiration period.

No matter how many statutory or non-statutory stock options you receive, you typically don't have to report them when you file your taxes until you exercise those options, unless the option is actively traded on an established market or its value can be readily determined.

What are NSOs? NSOs are typically used by more mature companies for higher-paid employees. These stock options are also given to contractors, consultants and other non-employees if companies want to give them more than $100,000 worth of stock annually.

Only employees can receive ISOs, whereas NSOs may be granted to any service providers (e.g., employees, directors, consultants, and advisors). ISOs must be exercised within three months following termination of employment (even if the holder continues providing services in some other capacity).

NSOs give you the option to buy stock, but you might decide to never exercise them if the company's valuation falls below your strike price. In comparison, restricted stock units (RSUs) are actual shares that you acquire as they vest. You don't have to pay to exercise RSUs; you simply receive the shares.

Non-statutory options (NSOs) are employee stock options that defer taxes until the options are exercised. People sometimes also refer to them as non-qualified stock options (NQOs). They can be given to anyone, including employees, consultants and directors.

You generally do not owe taxes when you are granted non-qualified stock options. You don't owe when your non-qualified stock options vest, either. This no-tax timeframe allows you to defer income tax while potentially creating considerable wealth if the value of your shares increases.

NSOs are by far the most flexible type of stock options. You can grant it to an employee and non-employee, like an independent contractor. An ISO can only be granted to an employee, so there's like one restriction. An NSO has a lot more flexibility for startups when cash might not always be available to pay your bills.