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Non-Qualified Stock Option – NSO Calculator

Written by:
PK

On this page is a non-qualified stock option or NSO calculator. The tool will estimate how much tax you'll pay plus your total return on your non-qualified stock options under two scenarios:

  • You exercise your options and hold at least one year before selling
  • You exercise your options and sell in under one year

Non-qualified Stock Option Calculator

Using the NSO Calculator

In the United States, non-qualified stock options are stock options defined by a negative – they don't qualify for the special treatment for incentive stock options. NSOs (as they are abbreviated) are available to everyone from employees to investors to advisors (and more) and – while complicated – have a straightforward taxation scheme.

This calculator lets you estimate how much it will cost you to exercise your options or will help you compute the gain in a given exercise and sale scenario.

Non-qualified Stock Option Inputs

Before you can use the tool to its full potential, you'll have to gather some data – and make some guesses at tax rates.

Stock Option Data

  • Number of options: how many shares you have the option to purchase
  • Options strike price: the strike price of your options grant
  • Exercise FMV or Assessment/409A: either the market price at exercise or the price per share from an independent assessment (generally a 409A for a private company)
  • Sale Price: the price to sell the exercised shares

Tax Bracket Information

  • Marginal Tax Rate (%): your tax rate on income at the margin, including any Federal, State, or Local taxes (include payroll tax as well, if applicable)
  • Short Term Capital Gains Tax Rate (%): your marginal tax rate (including any state and local addition) on investments held for less than a year
  • Long Term Capital Gains Tax Rate (%): your marginal tax rate (including any state and local addition) on investments held for more than a year

Non-qualified Stock Option Outputs

I've added two views in the tool:

  1. a simplified view that summarizes a scenario's cost to exercise, total taxes, and returns
  2. an advanced view which also shows capital gains and income breakdown

Note that you'll get two answers based on whether you hold exercised shares for more than a year or less than a year for both views. Short-term capital gains apply to investments held under a year – that column will show the cost to selling early (or, alternatively, if you're an optimist, the benefit to waiting!)

Simple Calculation

In the base scenario, you'll find 3 outputs

  • Cash to Exercise: the cost it will take for you to buy the shares granted to you by the option, including any applicable income tax
  • Total Tax: the total capital gains and income tax you pay in either scenario
  • Net / Gain: the net dollars you'll have in your pocket at sale followed by the gain you made net of your share purchase (in percent). Note that to find dollar gain, you'll want to subtract your cost of exercise.

Advanced Calculation

In addition, if you choose the advanced scenario you'll find a few more fields:

  • Ordinary Income: amount classified as ordinary income (markup between strike price and valuation)
  • Capital Gains: amount classified as capital gains (difference between exercise price and sale)
  • Income Tax: tax paid on the amount recognized as income
  • Capital Gains Tax: tax paid on the capital gains amount
  • Gross at Sale: the total dollar amount of the shares at sale, before any taxes

NSO Capital Gains Treatment

There aren't any complications on capital gains taxes for NSOs – capital gains taxation is defined by the IRS (and matched by most states and localities). The clock starts ticking as soon as you exercise the options, and:

  • If you hold an investment for more than one year, it's a Long Term Capital Gain.
  • If you hold an investment for under a year, it's a Short Term Capital Gain.

Work out other capital gains tax scenarios in our CG calculator.

Non-Qualified Stock Options: Way Better than a Lottery Ticket

It's worth working through all the scenarios if you hold non-qualified stock options. Hopefully, this tool was enlightening and helped you game out a few options... for your options.

If you see any issues (or have a request for another tool – this one was a request!) – please reach out through the about page.

And, note that none of this is investment or tax advice. Nothing – including this tool – substitutes for working through your options in a spreadsheet or turning to professional financial help. Early exercise can backfire in a down-round or when a company never provides liquidity: you can't predict future returns. See this excellent guide from Secfi, which covers some of the potential issues with NSOs.

Now, try some of our other benefit and retirement calculators:

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