In stock options net after tax calculation, what percentage is taxed at the marginal rate?

In stock options net after tax calculation, what percentage is taxed at the marginal rate?

• A. 25%
• B. 50%
• C. 75%
• D. 100%

Answer: (B)

When you exercise an employee stock option, you incur a benefit equal to the market value of the shares at exercise minus the exercise price. This benefit isn’t taxed entirely as ordinary income. In Canada, half of that option benefit is included in your employment income for the year and taxed at your marginal rate. The other half isn’t taxed as ordinary income at that moment; instead, it becomes part of the shares’ cost basis, and when you later dispose of the shares, you realize a capital gain on which only 50% is included in your income (capital gains treatment). So, the portion taxed at the marginal rate in the exercise year is 50% of the option benefit. For example, if the benefit is 20, half (10) is taxed now as ordinary income, while the other half (10) affects the cost basis and, when you sell later, only half of the resulting gain is taxed as a capital gain.

When you exercise an employee stock option, you incur a benefit equal to the market value of the shares at exercise minus the exercise price. This benefit isn’t taxed entirely as ordinary income. In Canada, half of that option benefit is included in your employment income for the year and taxed at your marginal rate. The other half isn’t taxed as ordinary income at that moment; instead, it becomes part of the shares’ cost basis, and when you later dispose of the shares, you realize a capital gain on which only 50% is included in your income (capital gains treatment).

So, the portion taxed at the marginal rate in the exercise year is 50% of the option benefit. For example, if the benefit is 20, half (10) is taxed now as ordinary income, while the other half (10) affects the cost basis and, when you sell later, only half of the resulting gain is taxed as a capital gain.