The terms of a California incentive stock option plan Think Legal, P.C., provides must adhere to statutory conditions of share quantity, employee class, pricing, and transferability restrictions to qualify as an incentive stock option plan. Internal Revenue Code § 422. As a California incentive stock option plan, the employee’s taxation upon receipt or exercise of stock options is limited to the difference between the exercise or option price of the option and the fair market value of the option. Only when the employee sells the underlying stock is the employee taxed. If the holding period is met, the sale is taxed to the employee as a capital gain; otherwise, the sale is taxed as income.
A nonstatutory stock option plan is more flexible than a California incentive stock option plan, as restrictions are not placed on prices, exercise periods, or holding periods. Unlike a California incentive stock option plan, where receipt or exercise of stock options is not generally a taxable event, the receipt of a nonstatutory stock option is taxed as ordinary income.
Option issuances are considered securities under both federal and California laws. 15 United States Code § 77b(1); California Corporations Code § 25019. All issuances of securities must be registered, qualified, or exempted. Under federal law, an option’s exercise is considered a sale, while under California securities law, it is not.