What are Non-qualified Stock Options?
WHAT DOES NON-QUALIFIED STOCK OPTION MEAN?
A non-qualified stock option does not qualify you for preferential tax treatment. You will pay ordinary income tax on the difference between the grant price and the Fair Market Value of the stock at the time you exercise the option.
Vesting is when you have met the required service period and may exercise the option to purchase stock. You are not required, however, to exercise your options as soon as they vest. Your stock option vests on a schedule determined by your company. Your vesting schedule is contained in your grant agreement and may also be viewed on StockPlan Connect, the Morgan Stanley website for stock plan participants.
Morgan Stanley offers several ways to exercise your stock options:
Same Day Sale/Exercise & Sell All.
The goal of this type of exercise is to acquire cash, rather than shares of stock. You are not required to make an upfront payment for exercising your options. Rather, option costs, applicable taxes, and fees are paid with the proceeds of the sale. You receive the net proceeds in cash. This exercise can be placed either as a market or limit order.
The goal of this exercise is to acquire stock without paying for the shares out-of-pocket. With a sell to cover exercise, you sell only enough shares to cover the option costs, fees, and applicable taxes. You receive the remaining balance in shares of stock. This exercise can only be placed as a market order.
Exercise and Hold.
With an exercise and hold, you use your personal funds to cover the option cost, fees, and applicable taxes. If you exercise 100 options, for example, you would pay for and receive 100 shares of your company stock.
A Market Order is an order to sell the shares acquired from your stock option exercise at the current market price. Morgan†Stanley will place the order immediately upon receiving your request to exercise.
A Limit Order is an order to sell shares at a specified price. When the stock price reaches the limit established, your order is submitted for execution. All orders that are placed with a limit price will be good until cancelled (GTC) and will expire one year from the order entry date. A cancellation of an existing GTC limit order can occur for other reasons including, but not limit to: (i) your instruction to cancel; (ii) pursuant to your Company’s plan rules or (iii) the GTC order has expired.
You may exercise your options on StockPlan Connect. We make it easy for you to track and exercise your stock options, and select between proceeds distribution methods online. Note that if you do not exercise your stock options before the expiration date, they will expire with no value. Please refer to your company’s specific plan details.
You can exercise your stock options through StockPlan Connect. Morgan Stanley offers several choices for proceeds delivery:
Deposit into a Morgan Stanley account.
If you are a current Morgan Stanley brokerage client, we will deposit cash or shares directly into your brokerage account on the settlement date. If you do not currently have a brokerage account with Morgan Stanley, we will open a limited purpose account for you. Your proceeds should be available to you three business days after the trade date (to account for a three-day “settlement” period that applies to all stock market transactions).
Check via regular mail.
If you choose this method, Morgan Stanley will mail your sales proceeds. You should receive your proceeds within 8-10 business days from the trade date.
Check via overnight delivery.
Morgan Stanley can send your proceeds via overnight delivery, for a fee. You should receive the proceeds of your sale in the form of a check four days after your trade date (to account for a three-day “settlement” period that applies to all stock market transactions).
Morgan Stanley can wire your proceeds to your bank on the Settlement Date for a fee. Wire transfers are in U. S. dollars.
Foreign currency wire.
Morgan Stanley can wire your proceeds to your bank in your local currency for a fee. You should receive the proceeds 4-5 business days after the trade date.
Foreign currency check.
Morgan Stanley can send you a check in your local currency for a fee. You should receive the proceeds 10-15 business days after the trade date.
The type of exercise impacts your income tax liability.
Exercise and Holds.
The difference between the grant price and the fair market value at exercise is reported as ordinary income. This will establish your new cost basis for the acquired shares. If you hold the stock for one year from exercise date, upon selling the stock, the difference between your cost basis and sale price is treated as long-term capital gain. If you sell your stock prior to the one-year anniversary of the exercise date, the difference between the sale price and the cost basis is treated as short-term capital gain.
The difference between your sale price and the grant price is reported as ordinary income. Please discuss all tax considerations with your tax advisor.
Call the Morgan Stanley Service Center at +1 866-722-7310 (U. S. participants) or +1 801-617-7435 (non-U. S. participants).
Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors do not provide tax or legal advice. Clients should consult their personal tax advisor for tax related matters and their attorney for legal matters. В.
Recommended Links.
Morgan Stanley Global Service Centers.
CHECK THE BACKGROUND OF THE FIRM ON FINRA'S BROKERCHECK.
Information on this website is general in nature. It is not intended to cover the specific terms of your company's equity plan(s). Please refer to your company`s equity plan documents if you have any questions.
В©2017 Morgan Stanley Smith Barney LLC. Member SIPC.

Non qualified stock options tax uk

If you receive an option to buy stock as payment for your services, you may have income when you receive the option, when you exercise the option, or when you dispose of the option or stock received when you exercise the option. There are two types of stock options:
Options granted under an employee stock purchase plan or an incentive stock option (ISO) plan are statutory stock options . Stock options that are granted neither under an employee stock purchase plan nor an ISO plan are nonstatutory stock options .
Refer to Publication 525, Taxable and Nontaxable Income , for assistance in determining whether you've been granted a statutory or a nonstatutory stock option.
Statutory Stock Options.
If your employer grants you a statutory stock option, you generally don't include any amount in your gross income when you receive or exercise the option. However, you may be subject to alternative minimum tax in the year you exercise an ISO. For more information, refer to the Form 6251 (PDF). 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. Add these amounts, which are treated as wages, to the basis of the stock in determining the gain or loss on the stock's disposition. Refer to Publication 525 for specific details on the type of stock option, as well as rules for when income is reported and how income is reported for income tax purposes.
Incentive Stock Option - After exercising an ISO, you should receive from your employer a Form 3921 (PDF), Exercise of an Incentive Stock Option Under Section 422(b) . This form will report important dates and values needed to determine the correct amount of capital and ordinary income (if applicable) to be reported on your return.
Employee Stock Purchase Plan - After your first transfer or sale of stock acquired by exercising an option granted under an employee stock purchase plan, you should receive from your employer a Form 3922 (PDF), Transfer of Stock Acquired Through an Employee Stock Purchase Plan under Section 423(c) . This form will report important dates and values needed to determine the correct amount of capital and ordinary income to be reported on your return.
Nonstatutory Stock Options.
If your employer grants you a nonstatutory stock option, the amount of income to include and the time to include it depends on whether the fair market value of the option can be readily determined .
Readily Determined Fair Market Value - If an option is actively traded on an established market, you can readily determine the fair market value of the option. Refer to Publication 525 for other circumstances under which you can readily determine the fair market value of an option and the rules to determine when you should report income for an option with a readily determinable fair market value.
Not Readily Determined Fair Market Value - Most nonstatutory options don't have a readily determinable fair market value. For nonstatutory options without a readily determinable fair market value, there's no taxable event when the option is granted but you must include in income the fair market value of the stock received on exercise, less the amount paid, when you exercise the option. You have taxable income or deductible loss when you sell the stock you received by exercising the option. You generally treat this amount as a capital gain or loss. For specific information and reporting requirements, refer to Publication 525.

Qualified vs. Non-qualified Stock Options.
Depending upon the tax treatment of stock options, they can be classified as either qualified stock options or non-qualified stock options . Qualified stock options are also called Incentive Stock Options , or ISO.
Profits made from exercising qualified stock options (QSO) are taxed at the capital gains tax rate (typically 15%), which is lower than the rate at which ordinary income is taxed. Gains from non-qualified stock options (NQSO) are considered ordinary income and are therefore not eligible for the tax break. NQSOs may have higher taxes, but they also afford a lot more flexibility in terms of whom they can be granted to and how they may be exercised. Companies typically prefer to grant non-qualified stock options because they can deduct the cost incurred for NQSOs as an operating expense sooner.
More details about the differences, rules, and restrictions of qualified and non-qualified stock options are provided below along with example scenarios.
Comparison chart.
How Stock Options Work.
Stock options are often used by a company to compensate current employees and to entice potential hires. Employee-type stock options (but non-qualified) can also be offered to non-employees, like suppliers, consultants, lawyers, and promoters, for services rendered. Stock options are call options on the common stock of a company, i. e., contracts between a company and its employees that give employees the right to buy a specific number of the company’s shares at a fixed price within a certain period of time. Employees hope to profit from exercising these options in the future when the stock price is higher.
The date on which options are awarded is called the grant date. The fair market value of the stock on the grant date is called the grant price. If this price is low, and if the value of the stock rises in the future, the recipient can exercise the option (exercise her right to buy the stock at the grant price).
This is where qualified and non-qualified stock options differ. With NQSOs, the recipient can immediately sell the stock she acquires by exercising the option. This is a "cashless exercise", because the recipient simply pockets the difference between the market price and the grant price. She does not have to put up any cash of her own. But with qualified stock options, the recipient must acquire the shares and hold them for at least oneyear. This means paying cash to buy the stock at the grant price. It also means higher risk because the value of the stock may go down during the one-year holding period.
Rules for Qualified Stock Options (Incentive Stock Options)
The IRS and SEC have placed some restrictions on qualified stock options because of the favorable tax treatment they receive. These include:
The recipient must wait for at least one year after the grant date before she can exercise the options. The recipient must wait for at least one year after the exercise date before she can sell the stock. Only employees of the company can be recipients of qualified stock options issued by the company. Options expire after 10 years. The exercise price must equal or exceed the fair market value of the underlying stock at the time of grant. For employees who own 10% or more of the company, the exercise price must be at least 110% of the fair market value and options expire in 5 years from the time of the grant. Options are non-transferable except by will or by the laws of descent. The option cannot be exercised by anyone other than the option holder. The aggregate fair market value (determined as of the grant date) of stock bought by exercising ISOs that are exercisable for the first time cannot exceed $100,000 in a calendar year. To the extent it does, such options are treated as non-qualified stock options.
Tax Treatment.
Why do people use qualified stock options in spite of these restrictions? The reason is favorable tax treatment afforded to gains from QSOs.
No taxes are due when qualified stock options are exercised and shares are purchased at the grant price (even if the grant price is lower than the market value at the time of exercise). When stocks are eventually sold (after a holding period of at least 1 year), the gains are considered long-term capital gains, which are tax-free for people in the lower two tax brackets (10% and 15%) and are taxed at 15% for people who are in higher tax brackets for ordinary income.
If stocks are sold sooner than the 1-year hold, it's called a "disqualifying disposition,” which is just like an NQSO.
When non-qualified stock options are exercised, the gain is the difference between the market price (FMV or fair market value) on the date of exercise and the grant price. This gain is considered ordinary income and must be declared on the tax return for that year. Now if the recipient immediately sells the stock after exercising, there are no further tax considerations.
However, if the recipient holds the shares after exercising the options, the FMV on the exercise date becomes the purchase price or "cost basis" of the shares. Now if the shares are held for another year, any further gains are considered long-term capital gains. If shares are sold before that timeframe, any further gains (or losses) are counted towards ordinary income.
Let's say an employee was awarded stock options on January 1, 2010 when the stock price was $5. Let's also assume that the employee's income is $100,000 and she is in the 28% marginal tax rate bracket for ordinary income. Now let's take a look at the different scenarios and calculate the tax implications.
Scenario 1 is the classic qualified stock option. No income is declared when options are exercised and no taxes are due in 2011. Stocks are held for over 1 year after purchase so all gains are taxed at the long-term capital gains tax rate of 15%.
Scenario 2 is an example of a disqualifying disposition even though the plan was a qualified stock option plan. The shares were not held for one year after exercise, so the tax benefits of a qualified ISO are not realized.
Scenario 1 and Scenario 2 under the non-qualified category represent the same situation when the grant was under a non-qualified stock option plan. When the options are exercised (2011), ordinary income is declared equal to the difference between the FMV on exercise date ($15) and the grant price ($5). In Scenario 1, the shares are purchased and held for more than one year. So the further gains ($22 - $15) are considered long term capital gains. In Scenario 2, shares are not held for more than one year. So the further gains are also considered ordinary income. Finally, scenario 3 is a special case of scenario 2 where the shares are sold immediately after they are acquired. This is a "cashless exercise" of the stock options and the entire profit is considered ordinary income.

Taxation of Employee Stock Options.
Incentive and Non-Qualified Options Are Taxed Differently.
There are two types of employee stock options, non-qualified stock options (NQs) and incentive stock options (ISOs). Each are taxed quite differently. Both are covered below.
Taxation of nonqualified stock options.
When you exercise nonqualified stock options, the difference between the market price of the stock and the grant price (called the spread) is counted as ordinary earned income, even if you exercise your options and continue to hold the stock.
Earned income is subject to payroll taxes (Social Security and Medicare), as well as regular income taxes at your applicable tax rate.
You pay two types of payroll taxes:
OASDI or Social Security – which is 6.2% on earnings up to the Social Security benefit base which is $118,500 in 2015 HI or Medicare - which is 1.45% on all earned income even amounts that exceed the benefit base.
If your earned income for the year already exceeds the benefit base than your payroll taxes on gain from exercising your nonqualified stock options will be just the 1.45% attributable to Medicare.
If your year-to-date earned income is not already in excess of the benefit base than when you exercise nonqualified stock options, you will pay a total of 7.65% on gain amounts up until your earned income reaches the benefit base than 1.45% on earnings over the benefit base.
You should not exercise employee stock options strictly based on tax decisions.
However keep in mind that if you exercise nonqualified stock options in a year where you have no other earned income, you will pay more payroll taxes than you’ll pay if you exercise them in a year where you do have other sources of earned income and already exceed the benefit base.
In addition to the payroll taxes, all income from the spread is subject to ordinary income taxes.
If you hold the stock after exercise, and additional gains beyond the spread are achieved, the additional gains are taxed as a capital gain (or as a capital loss if the stock went down). At Fairmark’s Tax Guide for Investors, you can find additional details on taxes that apply when you exercise nonqualified stock options.
Taxation of incentive stock options.
Unlike non-qualified stock options, gain on incentive stock options is not subject to payroll taxes. However it is, of course, subject to tax, and it is a preference item for the AMT (alternative minimum tax) calculation.
When you exercise an incentive stock option there are a few different tax possibilities:
You exercise the incentive stock options and sell the stock within the same calendar year. In this case, you pay tax on the difference between the market price at sale and the grant price at your ordinary income tax rate.
Tax rules can be complex. A good tax professional and/or financial planner can help you estimate the taxes, show you how much you'll have after all taxes are paid, and provide guidance on ways to time the exercise of your options to pay the least tax possible.