By Oleg Ikhelson, J.D., CPA, Managing Director, Head of Tax
Navigating the complex landscape of stock option taxation can be a daunting task, and unfortunately, many people find themselves paying income taxes twice, first as wage withholdings and then again as capital gains. This is often due to the widespread lack of knowledge of equity-based compensation among CPAs and tax lawyers.
A financial advisor with full visibility into your financial picture, in collaboration with your CPA, can help you mitigate capital gains tax.
Be wary of the tax traps below, and work with an experienced advisory team to avoid double payment of capital gains taxes.
- More than 90% of CPAs and tax lawyers lack a comprehensive understanding of stock option taxation laws. The intricate nature of these laws, and a limited view into your financial framework, frequently results in clients inadvertently paying taxes twice on the same gains.
- Don’t pay taxes twice on the spread. Consider this scenario: You exercise a non-statutory stock option (NSO) at $10 and sell it for $100, resulting in a $90 taxable spread. You pay tax on the spread, usually via a payroll deduction, but if your accountant reports a $90 capital gain based on an incorrect or incomplete IRS form 1099-B, you may end up paying taxes again when you file your tax return, even though you have already paid all the necessary taxes.
- Incentive Stock Options Complications. For those dealing with Incentive Stock Options (ISOs), the complexities multiply, especially with the Alternative Minimum Tax (AMT) paradigm. The IRS mandates option holders calculate gains under two separate systems, maintaining distinct records of cost basis for AMT, as well as regular tax purposes, which you do separately for each individual ISO grant. It is imperative to engage the services of an experienced and knowledgeable CPA and wealth advisor who is well-versed in options accounting to navigate the intricacies of ISOs and avoid overpaying taxes twice.
Protecting your wealth from the pitfalls of double taxation on stock options requires collaboration with experienced and knowledgeable professionals who have a keen understanding of tax laws. Your wealth advisor, equipped with a holistic view of your financial situation, should be able to identify instances where taxes have already been paid on capital gains and ensure the accurate reporting of your financial transactions.
Contact Cresset to connect with experienced professionals who can help you protect your assets and avoid overpaying taxes.