Re: Share options, BiK and huge losses
There are three options when exercising share options, all of which have different tax impacts. The examples below assume that the option scheme is not one of the small number of Revenue-approved option schemes which are subject to more favourable treatment. Let's assume that the questioner had 100 vested share options.
1) Exercise & sell - the option is exercised and the shares are immediately sold, resulting in a tax gain. The gain is subject to income tax at your marginal rate, as per any non-PAYE income.
2) Exercise & hold - this is where the option is exercised, and the recipients funds the option price to buy the shares outright. So he has 100 options at $15 to buy shares valued at $80 at that time. He pays over the €15 x 100 ($1500) and gets his 100 shares. In this case, the tax due can be deferred to either
- 31st October in 'year of assessment' following 'year of assessment' in which shares held are subsequently sold, or
- 31st October in year of assessment following year of assessment which falls 7 years after year of assessment in which options were exercised.
Simple, ain't it.
3) Exercise & sell to cover - this is a 'middle ground' whereby the recipient avoids handing over any cash, but keeps as many shares as he can. In this case, by exercising his options, he makes 100 x ($80 - $15) = $6500. He then uses this to buy shares at the current rate to hold 81 shares. He then gets to defer 81% of his gain as per option 2above, and 19% of his gain is treated as per option 1 above.
I'm not aware of any particular requirement to 'inform' the revenue that he is taking up the seven year deferral option. The advice from our tax advisors (Big Five firm) is that when exercising & holding, the income does not need to be included a tax return until the year after the shares are sold, or after seven years. Perhaps some strong negotiation with Revenue (who now have a specialised Share Options unit) might result in a positive outcome.
Whilst it may seem harsh to have any tax due in the case where there is an overall loss, it's not strictly accurate for the questioner to say that he never made a bean from his options. In strict terms, he got a substantial gain when he exercised his options, and then he chose to stay in the market by holding his shares. The fact that he then lost money by staying in the market doesn't eliminate the tax due on the initial gain. The only good news is that his capital loss on the shares can be used to write off any other capital gains on other shares or assets, now or in the future.