taxation of options

Taxation of Incentive Stock Options (ISO’s) The company offers a stock option in lieu of salary. The option is the right to purchase stock at a predetermined price called the excise or strike price. The stock can be purchased after a given period of time called the vesting date. The difference between the purchase price and the strike price is the spread. If the spread is positive the gain is taxed as ordinary income but no payroll tax is due. For example if your option price is $50 per share and the stock at the time of purchase is selling for $60 per share then you have a profit of $10 per share and that is taxed as ordinary income. If you then wait more than one year from the time you bought the stock and two years from the time it was offered to you and sell, any profit will be taxed as capital gain. I bring this up at this time because in the news today it was announced that the CEO of Apple received 1.4 million in salary, 2.8 million in bonus and 140 million in stock options that vest this year. In addition he got 175 million in options that vest in 2016 and another 175 million in options that vest in 2012. Lets calculate his tax rate. On the 1.4 million in salary he pays 35% and on the bonus he pays 25% on the first million and 35% on the last 1.8 million. The options are taxed at the capital gain rate of 15% so his total tax due is 35% of 1.4 million plus 25% of 1 million, plus 35% of 1.8 million plus 15% of 140 million. His total tax bill is 22 million and his total gross income is 144 million giving a tax rate of 15.2%. That is how Warren Buffett pays a lower tax rate than his secretary. If you want to tax the really rich you have to change the capital gain rate.