urchasing them they do not have the long-term ownership goal.A few simple terms with stock options are a call, a put, and a premium. A call is the right to buy the stock, a put is the right to sell the stock and its premium is the price of the option. Overall, options allow you to participate in price movements without committing the large amount of funds needed to buy stock outright. As mentioned earlier, incentive stock options and nonqualified stock options are the two existing types of stock options. According two the article Tax Attack, found in the November 2001 issue of Kiplingers Personal Finance Magazine, an estimated ten million employees own stock options as of 2001. For this reason alone it is important distinguish between the two types of stock options. The main difference between the two options is the way they are taxed. Nonqualified stock options are most common. These options are taxed along with income. The difference between the price at which the employer is allowed to buy the stock and the value of the stock on the purchase day is called the spread. Hence, when nonqualified stock options are bought their spread is taxed, just like income. This means that, just like a persons wage, social security and Medicare taxes will be taken out (Franklin and Stevenson, 2). For example, a person has the option of buying stock at $4.00 from his employer. When the stock is trading for $6.00 the employee will buy 100 shares. The spread is $200.00 in this case. Therefore, to abide by the law, $200.00 will be recorded in the extra taxable income section of the W-2 form. Also, with this stock, if it is held for more than one year, the gains or losses will be taxed at the capital gains tax rate. If a loss is encountered, the capital gains rate allows for a tax savings loss.Incentive stock options, conversely, are not taxed on income. The spread is not taxed at all. Instead, it is taxed at the capital gains tax rate. ...
