Tax on company options

Hi All,

I got paid a bonus in the form of options with an exercise price of £0.000001 (they are denominated in GBP). They have vested and now I am trying to figure out a couple of things.

First, is there any reason to exercise the options now? Seems I have to pay tax at the time of exercise even if I can't sell the shares until the next fund raise/IPO (company is still private)

Second, do I pay marginal rate tax on the exercise of the rights and on the sale of the shares?

Third, since I will be not working in Ireland or anywhere from Sept 2023 to Dec 2024. Is there any tax advantage to waiting until next year to exercise the option and sell the shares?

Anything else I should know? My company does have a FAQ but honestly it's still confusing.

harmlessdonkey said:

First, is there any reason to exercise the options now? Seems I have to pay tax at the time of exercise even if I can't sell the shares until the next fund raise/IPO (company is still private)

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That's arguably more of an investment question than a tax question. Without knowing more about the business it's not really possible to answer.

Second, do I pay marginal rate tax on the exercise of the rights and on the sale of the shares?

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Normally the difference between the (discounted) option price and the market price at the time of exercising is subject to income tax and then any gain subsequent to that is assessable for CGT at the time that you dispose of the shares. I'm assuming that it's not some share scheme that is subject to different tax treatment.

Third, since I will be not working in Ireland or anywhere from Sept 2023 to Dec 2024. Is there any tax advantage to waiting until next year to exercise the option and sell the shares?

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If you will not be assessable for income tax during that period then it would probably be more tax efficient to exercise them at that point. But the CGT will remain an issue if you make a capital gain subsequent to exercising them. But you shouldn't let the tax tail wag the investment dog. Investing decisions should generally be made on their own intrinsic merits even if tax issues also need to be considered.

Anything else I should know? My company does have a FAQ but honestly it's still confusing.

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Ask them to clarify whatever is confusing.

Whenever I was a member of similar stock incentive schemes I always sold shares as soon as possible on the basis that if I had the cash I wouldn't have been buying shares in my employer's company because to do so would be putting two eggs (investment savings and salary/job security) in one basket and I considered greater diversification to be a better risk mitigator.

That's arguably more of an investment question than a tax question. Without knowing more about the business it's not really possible to answer.

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Thanks. I think if I exercise the options now I pay tax and need to raise those funds to pay the tax before I realise and value from the shares. I suppose I'm also confused about what difference it makes investment-wise from exercising now v future. If I have 100 options at 0.00001 strike price and the share price is £100 now and then goes to £150 next year, what is the difference for me? Do I have to pay more tax because I got an extra £50 of value?

If you will not be assessable for income tax during that period then it would probably be more tax efficient to exercise them at that point. But the CGT will remain an issue if you make a capital gain subsequent to exercising them. But you shouldn't let the tax tail wag the investment dog. Investing decisions should generally be made on their own intrinsic merits even if tax issues also need to be considered.

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It's a case of I need the money so will be selling at the first opportunity of a fund raise/IPO as I need it to fund my year of travelling around the world so the tax treatment seems to be the biggest issue for me.

harmlessdonkey said:

Thanks. I think if I exercise the options now I pay tax and need to raise those funds to pay the tax before I realise and value from the shares.

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You can usually sell to cover (the tax).

I suppose I'm also confused about what difference it makes investment-wise from exercising now v future. If I have 100 options at 0.00001 strike price and the share price is £100 now and then goes to £150 next year, what is the difference for me? Do I have to pay more tax because I got an extra £50 of value?

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More income tax, yes.

It's a case of I need the money so will be selling at the first opportunity of a fund raise/IPO as I need it to fund my year of travelling around the world so the tax treatment seems to be the biggest issue for me.

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If the company is not yet public and there is no ready market for trading the shares that that's definitely an issue. I was assuming that the shares were already easily tradable.

It’s an investment call and funding is also an issue.

When you exercise, you pay income tax, USC, and PRSI on the difference between the exercise price, i.e. zero, and the market value of the shares at that time.

The taxes need to be paid within 30 days.

If you think that the value of the shares is going to increase, and if you can fund the tax payment, you should exercise now, as you only pay 33% CGT on any uplift from the value at which you exercised the options.

So if they’re worth €100 today and you expect them to be worth €200 in two years’ time, better to pay €52 of tax on the exercise of €100 now and €33 on the ‘other’ €100 gain in two years’ time than 52% on the full €200.

Thanks both, that's very helpful.

I assume if I exercise the options in Jan 2024, because I will have no other income that year I won't pay an income, USC, PRSI payments as the amount is only about 10k. Then if I sell I will only have a small capital gains which will likely be under the personal exemption so I won't pay any tax.