Rather, if the shares are held for 1 year from the date of exercise and 2 years from the date of grant (a "qualifying disposition"), then the profit made above the strike price is taxed entirely as a long-term capital gain, at a maximum rate of 23.8% as opposed to 37%.
[3] In the following decade, stock option grants became popular as a form of compensation, primarily for executives.
In October 2004, section 409(a) of the tax code was added by the American Jobs Creation Act of 2004, which set rules requiring the strike price of the option grant to be at least the fair market value, giving rise to the term 409(a) valuation.
[7] With NQSOs, on the other hand, the employer is always eligible to claim a deduction upon its employee's exercise of the NQSO.
[10] The 83(i) election provision and its requirements is very similar to the Empowering Employees through Stock Ownership Act proposed by senators Mark Warner and Dean Heller in 2016.
[11][12] On January 1, 2014, the employee of a private company receives a grant of 1,000 shares at a strike price of $1 vesting monthly over 4 years.
Note that the strike price for an employee's ISO grant must be set to the current 409(a) fair market value of the common shares, which is generally lower than that of the preferred valuation of shares owned by venture capitalists that is quoted in news.
[13][14] At this point, the company can choose to offer the option of early exercise: where an employee can purchase the entire grant before vesting, and perform an 83(b) election and notify the IRS within 30 days with form 83(b).
If the shares are not sold by the end of the year, this $199,000 bargain element, along with the employee's ordinary income, will be subject to the Alternative Minimum Tax (AMT) at a maximum rate of 28%, applicable if it exceeds the ordinary tax rate.
Additionally, there are several other restrictions which have to be met (by the employer or employee) in order to qualify the compensatory stock option as an ISO.