I am working at a startup in California, USA and I was given some options of the type ISO, with a four year vesting period. Very soon, I will complete one year and I would like to execute 1/4th of the shares. I have a confusion - how much tax I need to pay to IRS next year?
Let me explain with some numbers
- Country: USA
- State: California
- Options Type: ISO
- Total options allotted: 4000
- Strike Price: $1
After one year (19th March 2019)
- Vested options: 1000
- Strike Price: $1
- Current Price: $11
- Bought all 1000 options.
In 2020
- How much tax I need to pay on these options
One friend said
- As the current price (at the time of executing the options on 19th March, 2019) is $11, I got a paper gain of ($11 - $1) * 1000 = $10,000
- So, I need to pay taxes on $10,000
- Along with this I also need to pay some interest on the tax for the period from 19th March, 2019 to 31st December, 2019. As per my friend, IRS may ask me that if I know that much tax I need to pay, why I waited till the next year to pay those taxes.
Another friend said
- I don't need to pay any taxes. I need to pay this only when I get some money.
- One case is: if the company goes to IPO or
- Another case is: if some other company buys our company in the future
Help me understand how much taxes I need to pay, if any.
Update: Added missing country and options type in the above description.