What happens when you exercise an ISO?
When you exercise Incentive Stock Options, you buy the stock at a pre-established price, which could be well below actual market value. The advantage of an ISO is you do not have to report income when you receive a stock option grant or when you exercise that option.
Is exercise price the same as fair value?
When given employee stock options in a private or public company, your Exercise Price or Strike Price is the price at which you have the option to purchase a given number of shares. The exercise price is determined by the Fair Market Value (FMV) at the time the options are granted.
Is exercising ISOs a taxable event?
The first taxable event occurs when you exercise your ISOs. When you exercise your incentive stock options, you create a reportable tax event that is based on the spread between the grant price of the option and the fair market value of the stock when you exercise, multiplied by the number of shares you exercise.
Does 409A apply to ISOs?
Stock options that qualify as incentive stock options (ISOs) are not subject to section 409A. The exercise price may never be less than the fair market value (FMV) of the underlying stock on the date the option is granted.
Can shares be issued at less than fair value?
Transfer of shares without consideration or at a price lower than the fair market value (FMV) does not attract Section 56(2)(vii) of Income Tax Act, 1961.
Can the exercise price of a stock option be less than market value?
The general rule is that the exercise price of the stock option cannot be less than the fair market value of the stock underlying the option determined on the date of grant.
What are the tax implications of exercising an ISO?
After you exercise ISOs, if you hold the acquired shares for more than two years from the date of grant and more than one year from the date of exercise, you incur favorable long-term capital gains tax (rather than ordinary income tax) on all appreciation over the exercise price.
Can the exercise price of an option be less than FMV?
The exercise price may never be less than the fair market value (FMV) of the underlying stock on the date the option is granted. Section 409A regulations provide guidelines for valuing stock that is readily tradable on an established securities market and stock that is not so traded.
What are the requirements for an option to issue ISOs?
Requirements to Qualify Options as ISOs ISOs must be granted pursuant to a plan specifying the aggregate number of shares to be issued on exercise of the options and the classes of employees eligible to receive the options. Shareholder approval of the plan must be obtained within 12 months before or after its adoption.