united-states, taxes, stock-options, contractorsI’m an independent contractor working for a startup. I’ve been given the option to purchase some stock of the company at current pre-funding value. How do I represent this on my US taxes?
I am not trading work for equity: I have been given the specific option to purchase these shares.
Since you are an independent contractor, you cannot have been granted “statutory options”. Your options are instead considered to be “non-statutory”.
From what you have said, it is also likely that your option does not have a “readily determinable value”—for example, it is neither traded on an established market nor can you make a risk-free gain from its immediate exercise (as might have been the case if the underlying stock was currently trading for more than the strike price on an established market).
As such, you do not have any income tax liability for the options until either:
they are exercised and the resulting stock becomes substantially vested (i.e. is not subject to any restrictions under which you might be required to give it back)—you then recognise taxable income of the difference between the option’s strike price and the stock’s then fair market value; or
you transfer the option—you then recognise taxable income of the value thereby received and if transferred in a non-arm’s length transaction, you subsequently recognise further taxable income (of the difference between the option’s strike price plus the received value and the stock’s then fair market value).
See the Stock Options section of IRS Publication 525 (“Taxable and Nontaxable Income”) for more information.
For IRS purposes, you do NOT have an event when you purchase stock. You will need to keep the amount that you paid, however, for tax purposes.
The taxable event occurs when you SELL the stock.
If, as unlikely as it may be, the company you work for pays a dividend, then that is a tax event also.
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