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How are RSUs vs. Options taxed?

Is there any tax benefit of opting out for Options instead of RSUs? I understand that with RSUs, tax is paid when stocks are vested. Is there anything else to keep in mind?
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Level 13

How are RSUs vs. Options taxed?

Broadly speaking, almost all Employer Stock Incentive Programs are a form of compensation, one way or the other, and all of them are considered "options" of one sort or another.  All options are grouped into two large categories: "Qualified" options and "Non-Qualified" options depending on their structure.  Qualified options are taxed in a different manner than Non-Qualified options.  There are two widely used Qualified option programs commonly used by US employers: 1) Incentive Stock Options (ISO's) and, 2) Employee Stock Purchase Programs (ESPP's).  Most every other commonly used option plans are Non-Qualified.

RSU's are a form of Non-Qualified options that create compensation when they vest.  The compensation is the "spread" between the value of the stock at the vesting date and anything you paid to get the stock, (usually $0 for RSU's).  The taxes paid at that point are paid against that compensation.  The cash to pay those taxes typically comes from the sale of some of the stock that just vested, but you can choose to pay the taxes on your own, retaining ownership of all the stock. 

The compensation gets added to any "out of pocket" cost associated with receiving the stock, ( $0 for an RSU), to come to the basis for that stock.  Capital gain or loss can be created when you sell the stock calculated as the difference between the proceeds of the sale and the basis of the stock sold.  If you end up having a capital gain that gain will be taxed at capital gain tax rates.

Assuming for the moment that the "Options" you mention are Non-Qualified options, (NQSO's not ISO's), they create compensation when you exercise the option and pay the exercise price.  As with an RSU, the compensation is equal to the "spread" between the value of the stock at exercise vs. the price you paid to exercise.  And again, the fact that you received compensation creates the need for the withholding of taxes, paid by either selling some of the stock or out of your own pocket. 

Basis in the stock is determined in the same manner as for RSU's described above, compensation plus out of pocket exercise price.  And gain or loss on the sale of the stock depends on the difference between the proceeds received vs. the basis, possibly created capital gains to be taxed at capital gains rates.

As you can see, there's not a whole lot of difference, tax-wise, between RSU's and NQSO's.   The principal differences come down to the "mechanics" of the options and you'll have to judge which one might be "better" based upon the details of the options.

Tom Young

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