Tax on Stock Options - cost base

Hi folks. First forum post so try to be nice….

I have stock options through work. They were granted a few years ago at $10, and are now $30. I'm looking to exercise the options now.

As I understand it, the gain is $20 - which I will pay income tax on at the end of the tax year, if I sell them or not. I plan on holding them for at least a year. If I hold them for say 2 years and sell them at $40 (fingers crossed) my cost base is $30, and I only pay tax on the new gain of $10 (the difference between what I paid for them, $30, and what I sold them for, $40).

Because I held them for 12 months+ I only pay cap gains tax on 50% of the gain, right?

Thanks for any guidance!

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Comments

  • Wait! You pay tax on stocks you haven't sold by the end of the tax year? What if you don't sell them for several years and the stock loses value when you sell them eventually? Do you still have to pay tax on them every year you're holding the stocks? Sorry, I don't know anything about stocks/investment etc and was kinda confused how all this works.

    • No need to panic. You r correct, only pay tax when you sell

  • No.

    I have stock options that have made a gain since they were granted to me. If I exercise that option (buy it) and its worth more than when it was granted to me, I make a gain. I pay tax on that gain.

    • +1

      That's what I was asking though. Does making "a gain" mean after you sell it, or the fact that the stock is worth more now than when they were granted to you is considered a gain? In other words, do you pay tax on it if you make a gain (it appreciates/is worth more now) even if you don't sell it, or only after you sell it? Hope that makes sense.

      Edit:

      If I exercise that option (buy it) and its worth more than when it was granted to me, I make a gain.

      Sorry, maybe it's that part which confused me. I thought you already owned the stocks, so I might need to figure out what stock options are. Cheers

      • +1

        A stock option is a contract that allows a person to purchase or sell a stock at a given price in the future, there is no obligation to actually purchase or sell the stock.

        An oversimplified way to look at it is basically someone has to purchase the stock at it's current price of $30 (if they don't already own it) and sell it to the OP for $10.

        • Thanks. Yeah, did a little bit of reading last night re the type of stock options OP was talking about here and got overwhelmed with information, so your explanation makes it easy to understand. đź‘Ť

  • I have no idea and you need to get a professional advice but common sense tells me the following:

    • a CGT event will occur only when you sell shares and not when you exercise your options
    • if you sell shares more than a year after you got them by exercising options, you should be eligible for a 50% discount
    • when you sell shares your capital gain or loss will be calculated as following: Price per share when sold * number of shares - price per share paid when exercising options * number of options

    It would be a different story if you sold your options without exercising them though.

    • How can one sell options without exercising them?

      'a CGT event will occur only when you sell shares and not when you exercise your options' sadly I don't think this is true. If I have an option at $10 and the current fair market value is $20 - I have made a gain of $10. Everything I have read so far points to this being a CGT event.

      • An option is the right but not the obligation to buy/sell shares at a given price.

        Companies can issue options, and others can issue them on the exchange called exchange traded options.

      • Brightaussie is correct. Assuming you are not a trader, there's no CGT event until you sell the SHARES. The exercise price + original value of the option becomes the cost base.

        It is described clearly under "Example: Rights exercised"
        https://www.ato.gov.au/General/Capital-gains-tax/Shares,-uni...

  • +1

    Do you mean sell the shares or exercise an option?

    Exercise an option means to buy the shares.

    It's quite likely your company will partner with some mob to provide financial advice surrounding this.

    • -1

      We have Deloitte, but quite frankly they are useless and slow.

      I mean I will exercise the option. The gain here is the difference between the price I was granted at (and will therefore pay in cash) which is $10 and its current market value, say $20. The difference or gain is $10. This is taxable as I understand it.

  • +1

    If you do have options then yes you are correct I'll add:

    Because I held them for 12 months+ I only pay cap gains tax on 50% of the gain, right?

    Yes.

    The exercising of an option may still be subject the the CGT discount it depends if it's part of an ESS or not.

    I'd recommend giving the ATO a call tomorrow they are super helpful.

    • Will do. Thank you!

      I do get an ESS certificate at the end of the year, so there is some hope….

  • +3

    You shouldn’t ask for financial advice on a car crash investigation site.

  • +2
  • +1

    There are two points of tax in your question, one at acquisition and next at disposal. Your understanding of the tax on disposal of the shares is correct.

    On acquisition the discount you receive maybe taxed as your income, or as fringe benefits. Depending on the grossed up value of the benefits, they may not be reportable benefits. Also, share options are valued using a complex formula under the Income Tax Act Regulations.

    You don’t have to worry with the values here, because your employer will calculate and disclose any taxable value either as shares granted or as fringe benefits. Previously these values were reported in your payment summary, now you should be able to see these in your my gov account. When you lodge your return if asked a question on shares or fringe benefits, answer them, and the return would prompt you to include the correct values.

    You shouldn’t trust me, an internet expert of unknown expertise, ask someone you work with who has received shares previously.

    • +1

      +1
      "share options are valued using a complex formula under the Income Tax Act Regulations" <- that. It's not as simple as when you buy shares on ASX hold and sell them later. You will likely to pay tax on options from the day they are vested, even if you don't exercise them. Also, you are likely to keep paying taxes annually after you exercised your options even you have not sold the shares. As spal mentioned, the company calculates that for your and should provide you with Employee Share Scheme statement

      • @andrek thank you.

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