ISO taxation: Know the rules to make them work for you


Compensation in today’s “pay-for-performance” environment often uses equity-based instruments that help align the interests of executives with their company’s shareholders, an alliance that should help guide decisions that are fruitful for all. Consequently, understanding the taxation rules surrounding equity-based compensation such as stock options and restricted stock can lead to cost savings that provides a company even more value.


Our paper, “Taxation of stock options and restricted stock: Basics and beyond” provides numerous examples that illustrate the ramifications of how incentive stock options (ISOs) are valued through time and what possible effects a sale of such stock has on calculating taxable income. These explanations include discussions of:

  • Disqualifying dispositions: When a stock acquired with an ISO is sold under certain conditions, it can lose favorable tax treatment.
  • Alternative minimum tax liability: A consequence of a disqualifying disposition, our story provides illustrations that can minimize AMT liability that are associated with exercising ISOs.
  • Limits of ISOs: Despite the favorable tax treatment for ISOs, there are reasons to limit their issuance to company executives.

The rules regarding the taxation of stock options and restricted stock are complex, but is important to understand these tax rules to maximize the after-tax value of equity-based compensation. Download a copy of our report here and learn more.



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