It is important to determine if your stock is vested. Your stock is vested when you can claim its full value, even if the issuing company no longer employs you.
Your tax liability is based upon the fair market value of your stock.
Employees receiving equity compensation may have their earnings withheld in cash, even if the compensation is stock or other property.
Other special rules apply if you are an employee receiving stock as compensation or if you are a hired consultant or board member receiving stock as compensation for services provided. For instance, if the stock is full vested when you receive it, you must report it as income at the time you receive it. If the stock is not fully vested at the time you receive it, you must report it as income when it becomes fully vested. If you acquire stock that has not vested, you have thirty days to claim it as income compensation upon receipt, instead of the year in which it is vested. This election is beneficial if the stock value is expected to rise or if you paid full value for the stock.
When exercising a non-qualified stock option, you report income compensation in the amount of the difference between the value of the stock and what you paid in order to exercise your option. If you are an employee, this income compensation is subject to withholding.
Upon selling this stock, you report a capital gain or loss subject to the amount you paid for the stock plus the compensation you reported when you exercised the option.
Incentive Stock Options are available only to employees and are fairly complex. You report no income compensation at the time you receive an ISO or at the time you exercise your option. You do, however, have to make an Alternative Minimum Tax calculation when exercising the option. When you sell the stock, you report a capital gain or loss, but no income compensation. However, if you sell the stock before a certain time elapse quotient, you have made a disqualifying disposition and must report income compensation. If you hold the stock for the required time period, you may be able to claim a credit for most or all of the AMT you paid when you exercised the stock.
When investing in stock and options it might be a very good idea to consult with an investment specialist to determine the effects of your stock and options strategies upon your tax liability situation.