codermonkey
New Member
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Hi,
I live and work in the UK for a US technology company that issues NSO share options as part of the renumeration package.
I understand I will eventually have to pay income tax and capital gains on these when I exercise the options and sell the shares. I'm trying to work out the most tax effective way to do this, but struggling to understand all the rules under different scenarios.
Has anyone previously been through this and can they help give clarity around the calculations?
I have three scenarios I want to consider:
1) Exercise options Pre-IPO and sell Post-IPO (objective is to reduce tax burden)
2) Exercise options Post-IPO and sell Post-IPO (this reduces the risk for myself but I believe will result in having to pay more tax)
3) Exercise some options Pre-IPO and sell Pre-IPO (objective is to free up some capitable to help reduce other debts, or to purchase remaining options)
Exercise options Pre-IPO and sell Post-IPO
If I exercise my options now, and sell post IPO I believe the tax is worked out like this:
1) Pay for options (strike price x no of options): 2 * 10,000 = $20,000
2) Income tax at 40% (calculated on the difference between the strike price and fair market value): (5 * 10,000) - (2 * 10,000) * 40% = $12,000 income tax
3) When I sell options post IPO the gain is the difference between what I paid and what I sell them, so I paid 20,000+12,000 in tax (32,000). Assuming the post IPO price is $30, then I sell for 300,000. So pay cap gains at 20% on (300,000-32,000) = 53,600 cap gains tax.
Exercise options Post-IPO and sell Post-IPO
My understanding is this is the same as above, except when calculating income tax, its the difference between the strike price and what I actually sell the shares for, so if I pay $20,000 and I sell for $300,000, then I pay income tax at 40% on 280,000 = 112,000. In this case do I also pay capital gains tax?
Exercise some options Pre-IPO and sell Pre-IPO
I'm even more confused about this one. Is it like the scenario above, where I pay income tax on the full amount.
So lets say I sell a portion (5000) of my options to pay of some debt.
Strike price * 5000 = $10,000
Gain based on fair market value (5) * 5000 = $25,000
Actual money paid (assuming buyer is paying $10) 10 * 5000 = 50,000.
Is income tax calculated using the FMW, and Cap gains calculated on the actual profit, or is the actual sell price used to calculate all the tax?
Another thing I'm unsure of in each scenario is where NIC is paid, and how it fits into the calculations. If anyone is able to advise based on knowledge or prior experience of going through the process I'd appreciate it.
I live and work in the UK for a US technology company that issues NSO share options as part of the renumeration package.
I understand I will eventually have to pay income tax and capital gains on these when I exercise the options and sell the shares. I'm trying to work out the most tax effective way to do this, but struggling to understand all the rules under different scenarios.
Has anyone previously been through this and can they help give clarity around the calculations?
I have three scenarios I want to consider:
1) Exercise options Pre-IPO and sell Post-IPO (objective is to reduce tax burden)
2) Exercise options Post-IPO and sell Post-IPO (this reduces the risk for myself but I believe will result in having to pay more tax)
3) Exercise some options Pre-IPO and sell Pre-IPO (objective is to free up some capitable to help reduce other debts, or to purchase remaining options)
- Lets assume I have 10,000 options all vested.
- The strike price (price I have to pay to exercise) is $2
- The current fair market value is $5
- On the private (pre IPO) market buyers are paying up to $10
- Post IPO we assume the price will hit $30
Exercise options Pre-IPO and sell Post-IPO
If I exercise my options now, and sell post IPO I believe the tax is worked out like this:
1) Pay for options (strike price x no of options): 2 * 10,000 = $20,000
2) Income tax at 40% (calculated on the difference between the strike price and fair market value): (5 * 10,000) - (2 * 10,000) * 40% = $12,000 income tax
3) When I sell options post IPO the gain is the difference between what I paid and what I sell them, so I paid 20,000+12,000 in tax (32,000). Assuming the post IPO price is $30, then I sell for 300,000. So pay cap gains at 20% on (300,000-32,000) = 53,600 cap gains tax.
Exercise options Post-IPO and sell Post-IPO
My understanding is this is the same as above, except when calculating income tax, its the difference between the strike price and what I actually sell the shares for, so if I pay $20,000 and I sell for $300,000, then I pay income tax at 40% on 280,000 = 112,000. In this case do I also pay capital gains tax?
Exercise some options Pre-IPO and sell Pre-IPO
I'm even more confused about this one. Is it like the scenario above, where I pay income tax on the full amount.
So lets say I sell a portion (5000) of my options to pay of some debt.
Strike price * 5000 = $10,000
Gain based on fair market value (5) * 5000 = $25,000
Actual money paid (assuming buyer is paying $10) 10 * 5000 = 50,000.
Is income tax calculated using the FMW, and Cap gains calculated on the actual profit, or is the actual sell price used to calculate all the tax?
Another thing I'm unsure of in each scenario is where NIC is paid, and how it fits into the calculations. If anyone is able to advise based on knowledge or prior experience of going through the process I'd appreciate it.