December 8, 2012

SOUNDS LIKE A GOOD ARGUMENT FOR DAN MITCHELL’S PROPOSED EXCISE TAX ON CEO PAYCorporate CEOs: Raise Taxes on Top 2%. Also, income from the exercise of stock options should be taxed as ordinary income, not capital gains, since it’s a replacement for salary. . . .

UPDATE: Reader Mike Chittenden writes:

I am an employee benefits and executive compensation lawyer. I just wanted to point out that income from stock options is almost always taxed as ordinary income. Only if the stock option qualifies as in incentive stock option is it taxed as capital gains. To qualify as an incentive stock option, the option has to be held for a certain amount of time and the stock has to satisfy holding requirements after the option is exercised. In addition, there are other requirements relating to the option being granted to an employee and limits on when it can be exercised (during employment or shortly after). Finally, the limit on incentive stock options is $100,000 per year (it’s a little more complicated, but that’s the basic limit). Almost all CEO options are not ISOs, but are nonqualified or nonstatutory stock options. Those are always taxed as ordinary income and are subject to employment tax (if granted to an employee).

Incentive stock options is what I meant, but I didn’t realize that CEO options weren’t usually those. My mistake, and thanks for correcting me.