I just got stock options, this is new to me, and I'm not too bright.

Let's say I'm pretty confident the stock will climb for 3 years

The stock price is already 20% over my vesting price.

Should I vest now, hold the stock 3 years, then sell?
Or should I just vest and sell in 3 years?

I can't see a difference, and I wonder about the tax impact.

Any help would be appreciated!

Exercise before a year and it's short term cg, after a year is long term

I live in Canada. I don't think the difference between short and long term capital gains applies.

If it's a meaningful amount of money you should consult a local Canadian tax accountant.

Most employee stock options don't let you exercise them (buy the stock at the option price) for some number of years. It's an incentive to remain working there. If you quit before the date, you forfeit. Aside from that, buying the stock is never a taxable event. Only selling.

Most people buy and sell the stock option simultaneously. Usually you have something like 10 more years to do it after the vesting period.

OP, as mentioned, i think your terminology is wrong.. you don't vest your options. they vest over time served (i assume they vest automatically with time, but who knows, you might have do a tiny amount of admin every year)

you can choose to exercise your options....

i did notice from simple googling that exercise of options seems to be a taxable event in canada (not sure if you can defer the tax until you sell, it didn't seem like it).

but here's where it gets scary... you may owe tax and not have money to pay it as you haven't sold any stock... "ok, so i'll sell some stock to pay the taxes"... but if you don't do it right away, the stock could have dropped.

and this leads to 2 HUGE PROBLEMS, 1) you are being taxed on money you never actually made - or perhaps better to say that you never got the cash, 2) you might think the drop in stock price will lower your option income tax. but NO, your option income is employment income (i.e. something your employer gave you) whereas the stock drop is capital loss. they DO NOT offset......


the article i read was 2015 but seemed to be updated to 2018... so be very careful... i will post the link

basically with northern telecom and RIMM/Blackberry, i'm pretty sure that some people paid huge taxes (bank loans?) and then the optioned stock went to zero.. complete disaster.

https://www.theglobeandmail.com/glob...ticle23527077/

The other thing I didn't mention, is there is a reason people usually buy and sell a stock option at the same time. As long as you don't buy the stock you have no risk of it going down and you losing money. So you wait until you know it's profitable, and then you buy it and sell it the same day.

You may be confusing employee stock options with reserved stock grants. You'll never be taxed on an employee stock option until you have bought it and sold it.

Thanks guys. Yeah I was told that if I exercise my options (thx for correcting my terminology), I should sell asap in case the stock dropped. And yes exercising options is a taxable event in Canada.

My very basic question is: what's the difference between me exercising asap, paying little taxes (because the stock at this moment is low), and just holding on to the stock until it skyrockets to the moon (or risking to loose the small amount of taxes I paid if it drops to zero).

OR

Me exercising ONCE it skyrocketed to the moon? It feels like I would pay more taxes on then (my understanding is that I will be taxed on the difference between the exercise price and the fair market value of the stock - and furthermore I understand this is taxed as working revenue and not capital, so at a higher rate).

I feel like I am missing something.

Ah well that answers part of my question thanks. But if the stock skyrockets I feel like i'll be paying a ton of taxes, at a high rate because it will be considered as income from my job.

My understanding they are taxed in Canada.

This.

I live in canada also, as a general rule, we get taxed on everything. You can probably find ways to reduce the tax burden with a competent consultant thought.

The point is not how much tax you pay. It is how much money you keep.

just to preface, i won't post again here but i really don't know. i have some idea and then i'm googling the rest.

http://madanca.com/blog/taxation-of-...ees-in-canada/

it looks like exercising the option is the taxable event. and this article explicitly says the tax can not be deferred.

if you are fine paying a small amount of tax (say $3000 or $5000) and you believe in the company then "go for it"

if it's a meaningful number relative to your financial circumstances, i would sell the stock to at least pay the taxes. i would not take a loan to pay the tax.......

one thing i would mention is that it seems like every single canadian high flying stock dies a very violent near-death (laidlaw, loewen, newcourt, valeant, nortel, black berry). and i think general financial market conditions are nowhere near as good as they were when those aforementioned companies soared.

and just to repeat, make sure you understand that your stock option income is basic income, you stock gain/loss on holding the stock is capital (a loss being nowhere near as good). they don't offset, even in separate years.

its tax now or tax later. if you do it now and then the stock goes up you still pay taxes on the sale of that stock at the new higher price.

keep the options. the time value of the options is likely worth way more than the tax considerations.

It's strange that Canada taxes on an unrealized paper gain, that can't even be realized for some number of years in most cases, and could turn into a loss in that time.

can these people not just immediately sell all their stock? the tax is on exercising, not being awarded the vested options (and then they'd still need to vest)

i realize there might be "real life" reasons not to do that i.e. a stock holding looks good on your employment.

you are correct though i think that it could turn into a loss over time (with non-offsetting tax treatment) and that it might be a bit odd. also, you'd think getting employees to invest in their companies is good for the economy and the country.

you are receiving something with tanglible value, the option. so you can always sell it if you'd like. also for private corps i think there is no tax until exercise.

But that's not how Employee Stock Options generally work. You get a piece of paper (or a digital one) that guarantees you a stock price that you can buy it at for some period of years, often 10. But there is always a vesting period for the first few years, during which you can't "exercise" the option, meaning you can't buy the stock. Sometimes it vests in phases, maybe 33% per year. The vesting period is the incentive to continue working at the firm, so that you can get the advantage of the stock price in the future when hopefully the price has gone up.

In the U.S. the act of receiving the stock options usually has no value because the option price will be similar to the current market price. It is not a taxable event until you actually buy something, which might be never. Lots of people have stock options expire worthless.

When the OP said " just got stock options, this is new to me" I assumed he had just been granted the options. Not that he got them years ago and now he can exercise them, and it seemed he was misusing the word "exercise". He was definitely misusing the word vest, because nobody gives away vested options, it isn't even legal.

OP - when where the options granted and when do they vest?

Exercising a call option and not selling defeats the entire purpose of having the option in the first place. Generally you should either hold until expiration date or exercise and sell right away. Since you are bullish you should plan on holding until expiration date, unless the stock becomes overvalued at some point down the road. In which case, you should exercise and sell.

Exercising without selling to avoid taxes could actually make sense granted the amount you save on taxes outweigh the financial risks of the stock falling below the strike price. Intuitively, this seems unlikely to me, but I could be wrong.

Trying to exercise and sell in chunks for tax reasons can be reasonable, but you'll need to give more specific information on how much you make per year, how many options you have, the current value of the underlying stocks, the Canadian tax brackets, and expected income in the future.

If the stock becomes overvalued to the point where the current price subtracted from the fair price is greater than the amount you save on taxes, I would exercise and sell right away. You could try and play the game of holding an overvalued stock for a tax advantage, but playing this game can be costly. Most of the time, I think it is better to take the conservative route by just taking the money and run.

The advice I gave in the first paragraph seems quite reasonable, especially if you aren't going to be doing a bunch of calculations and other stuff. It could save you a lot of hassle if you miscalculate somewhere. Sometimes the simpler approach ends up making more money in the end.

are you saying a vested option has no tangible value?

Unvested has no value. Vested has the value of any gain in price over the option price. In the U.S. it's taxed the same as if you just buy the stock on the market without an option, i.e. it's only taxable on the gain after the sale. Paper profit on stocks is not taxable in the U.S.

My questions to the OP in the post above were about him saying he was just granted the options, but that they are already vested. It doesn't usually happen that way, but probably just a miscommunication. Employers don't grant stock options that have a lower price than the market at the time of the grant. They grant them at current price and you benefit only from the future gain. That's why I also asked if he was actually talking about RSU's or actual stock grants, which are different than employee stock options. Those are actual stock given to the employee, that have immediate value.

And I understand that Canada apparently does tax paper gains on employee stock options at the time that they vest (not when granted).

There's no taxation of options at time of vesting in Canada.

There are cases where there is taxation of gains when exercising an option. Although it depends on the circumstances - for example, generally employees of private Canadian companies wouldn't owe tax when exercising, only when the shares are actually sold.

There's no time limit for holding the shares to get beneficial tax treatment.

It's actually not particularly complicated and well documented online, but obviously talk to a tax professional (which I am not) if its a meaningful amount of money and you're not comfortable figuring it out yourself.

Also, because it can be confusing, the amount of tax you pay for employee stock options is the same as the capital gains amount (half of your marginal tax rate). For most people this means there isn't a meaningful difference - particularly if you just sell a portion of the shares to cover your tax owed right away. If you have more complicated situations (for example a bunch of capital losses) then it might be meaningful - but again, at this point you should probably be dealing with a tax professional.