Taxes and Equity

Taxes on equity are a complex matter. They heavily vary from country to country and even within countries you can have different plans with different tax regulations. There are three lifecycle stages that you experience as an equity holder: Grant stage when you get your equity allocation, Exercising - when options transform into shares, and Sale - when you sell your shares. Let’s explore in detail.

The information provided in the following is intended for general guidance and educational purposes only. It is not legal, financial, or tax advice. The actual tax treatment of equity plans can vary based on the specific details of the equity plan, individual tax status, and changes in tax laws. We strongly recommend consulting with a qualified tax or legal advisor, to obtain personalised advice before you take any action with respect to your equity. Keep in mind that tax laws are subject to change, and it is important to stay informed about any updates that may impact your equity taxation.

Grant

At grant date there is typically no taxable event. Other than agreeing to the terms of the contract this moment has no other impact on you.

Under an EMI scheme in the UK the grant stage is still a very important moment. The EMI scheme has a very unique characteristic, compared to other schemes in other jurisdictions, where the actual market value (AMV) and unrestricted market value (UMV) are determined for your grant on its grant date (and not when you exercise). These values later determine the taxation when you exercise.

Exercise

Taxable event is when you exercise your options. In the majority of European countries - United Kingdom, Germany, France, Netherlands, Spain, Sweden, Italy, Belgium - stock options are usually taxed as income at the time of exercise only.  You will be taxed an income tax on value of your shares minus the strike price costs you had to pay to exercise, the tax rate on this difference is at a standard income tax rate. If there is no difference between the value and strike price, then you don’t pay any taxes at this times.

Sale

The second taxable event is when you sell the shares. At this point you will usually have to pay a capital gains tax on the sale price minus value at exercise. In the example below, at the exercise stage company value was at 3 EUR per share, while 5 years later with the company going IPO at 40 EUR, there’s additional value gained per share, 37 EUR on top of the original 3 EUR per share, and this marginal difference is subject to capital gains tax.