Under the current employee stock option rules in the Income Tax Act, employees who exercise stock options must pay tax on the difference between the value of the stock and the exercise price paid. Provided certain conditions are met, the employee can claim an offsetting deduction equal to 50% of the taxable benefit.
Employee stock options can provide a quality source of income in addition to cash compensation. If a company prospers and the stock price rises, you share in the company's success, and your hard work is rewarded in a tangible way. For both employees and non-employees, this is a particularly powerful compensation tool.
Advantages of Options Trading:
When you buy stock under an employee stock purchase plan (ESPP), the income isn't taxable at the time you buy it. You'll recognize the income and pay tax on it when you sell the stock. When you sell the stock, the income can be either ordinary or capital gain. ... At least one year after you buy the stock.
14 Ways to Reduce Stock Option Taxes
Statutory Stock Options
You have taxable income or deductible loss when you sell the stock you bought by exercising the option. You generally treat this amount as a capital gain or loss. However, if you don't meet special holding period requirements, you'll have to treat income from the sale as ordinary income.
Stock options essentially pay for themselves by motivating employees to increase the value of the business and thus generate their own financial reward. In contrast, a salary doesn't have the same motivating effect.
In general, you have rights only to stock options that have already vested by your termination date. If the options have a graded vesting schedule, you are allowed to exercise the vested portion of the option grant, but most commonly you forfeit the remainder.
Stock option plans often prove to be a strong benefit for employees and cost-effective for companies. ... Added to the ability to attract, keep and motivate staff, the cost efficiency of stock options helps many smaller companies compete with larger organizations by offering comparable benefit programs.
Disadvantages
The bad part of options trading is that if you are buying puts and calls, your winning percentage is likely to be in the neighborhood of 50%, considerably less than a typical long-term stock investing system. ... The fact that you can lose 100% is the risk of buying short-term options.
Disadvantages of Option Trading
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