You’ve exercised and sold your employee stock options in the last year, and now you’re curious whether that will bump you up into a higher income tax bracket.
Short answer — it might. It all depends on how long you held onto your exercised shares before selling them.
The most common way of exercising stock options is what’s known as a cashless exercise. Employees with stock options wait until their company goes public or gets acquired, and then simultaneously sell their shares and use the proceeds to pay for their stock option exercise costs and any related taxes.
If you performed a cashless exercise in the last year, any money you made in the transaction will be treated as ordinary income, and could bump you up into a higher income tax bracket.
Additionally, the brokerage firm that handled your cashless transaction likely withheld a portion of your total proceeds from the sale, to pay taxes on your behalf. When it comes time to file your taxes, you’ll want to double-check that they took out the correct amount in taxes — ultimately, paying the correct amount of taxes is your responsibility.
Now, let’s say you didn’t perform a cashless exercise. Instead, you exercised your stock options, held onto them for at least a year, allowing you to sell your shares under the long-term capital gains tax.
In that case, you’ll pay either 0 percent, 15 percent, or 20 percent in long-term capital gains taxes, based on your other income that year. The majority of working people fall into the 15 percent long-term capital gains tax bracket.
Want to learn more about stock options? Check out our educational resources at Secfi Learn.