Understanding Stock Option Income

When payees sell stock that they acquired through stock options, the resulting earned income can fall into three different categories:

  • Tax exempt income.

  • Irregular income.

  • In kind income

Tax Exempt Income

The system considers up to a certain statutory amount of stock income to be tax exempt if the payee selling the stock:

  1. Held the stock for at least three years before selling it.

  2. Acquired the stocks through a general plan. This means that the issuing company offered options to all employees under the same conditions.

  3. Is an active employee of the company that issued the stock options.

Note: Tax exempt stock income is also exempt from Social Security contributions.

Irregular Income

For stock income that does not qualify to be tax exempt, the system treats a portion of it as irregular income if the payee who sold the stock acquired it over an accrual period greater than two years. The system reduces irregular income by a territory-specific percentage before adding it to the total taxable base. The maximum amount of stock income that can be considered irregular income is the statutory Medium Average Salary × years of income generation. This maximum amount is doubled for payees who:

  1. Held the stock for at least three years before selling it.

  2. Acquired the stocks through a general plan. This means that the issuing company offered options to all employees under the same conditions.

Note: The system does not reduce irregular income when determining Social Security contributions.

In Kind Income

The system considers any stock income that does qualify as tax exempt or irregular income as in kind income. Payees are responsible for paying any taxes associated with this income. Therefore, in kind stock income fall under the category of IRPF recupertido.