The calculation of capital gains and losses from equity stock options is substantially different than the calculation of gains and losses from other capital assets. While most other assets are divided between short-term and long-term assets based on holding period, gains and losses on equity stock options are calculated annually, and split 60 percent long term and 40 percent short term, regardless of the actual holding period.
Calculation of Capital Gains
Determine the basis of your interest in the stock options. Typically, your basis is equal to the price you paid to acquire the stock options plus any costs associated with the acquisition, such as brokerage fees.
Determine the selling price or mark to market value. If you sold the stock options during the tax year, your selling price is the gross proceeds you received from the sale of the stock options, less any costs associated with the sale. If you have not sold the stock options during the year, your mark to market value is the fair market value of the stock options on December 31 of the tax year.
Subtract the basis determined in Step 1 from the selling price, or mark to market value, determined in Step 2. This will be your capital gains or losses on the sale of the stock options.
Multiply the capital gains or losses on the sale of the stock options by 60 percent. This is your long-term capital gains or losses.
Multiply the capital gains or losses on the sale of the stock options by 40 percent. This is your short-term capital gains or losses.
Multiply any long-term capital gains determined in Step 4 by your long-term capital gains rate. Your long-term capital gains rate depends on your ordinary income tax bracket. For taxpayers in an ordinary income tax bracket of more than 25 percent, the long-term capital gains rate is 15 percent. For taxpayers in an ordinary income tax bracket of 25 percent or less, the long-term capital gains rate is zero.
Multiply any short-term capital gains determined in Step 5 by your short-term capital gains rate. Your short-term capital gains rate is equivalent to your ordinary income tax bracket.
Add the amounts from Steps 6 and 7. This is the aggregate capital gains tax paid from the stock options.
Michael Dreiser started writing professionally in 2010. He is a certified public accountant with experience working for a large New York City accountancy and expertise in areas ranging from private equity taxation to investment management. He holds a Master of Business Administration in international finance from l’École Nationale des Ponts et Chaussées in Paris.