Options are not taxed until you exercise them. At that point they become an asset that contains "value" but until you exercise the option to purchase stock it is simply only the right but not the obligation to purchase stock at a particular price. When issued options you don't have to exercise them and if you don't you do not pay taxes until you decide to.
Often companies offer the ability to "early exercise" options which means you buy them before they have vested and file with the IRS that you have done this. The reason you might do this is because the strike price of your options will likely be the same as "fair market value" of the stock. This means that when you buy them you do not pay any taxes since the difference is 0.
If you wait and exercise your options then you pay tax on the difference between the "fair market value" and your option strike price. This is taxed as a short term capital gain. However, you now hold the equity and if you sell it 1 year or later you pay a long term capital gain which is generally advantageous. This gain is the price you sell minus the value at the time you purchased.
Often, for people issued options they will exercise and sell immediately when/if the company goes public and they can sell. You keep the difference between what you sold them and what your strike is and you pay taxes on that profit.
The biggest issues are when you want to leave a company but have not bought your options. These are golden handcuffs and it's a decision you need to make if you want to buy them. For a company that is looking good you can often get a loan to buy them. But now you're invested in an illiquid investment of which you can't possibly know the real value. That's a big risk with potentially a large payout.
>Options are not taxed until you exercise them. At that point they become an asset that contains "value"...
The assertion that they then contain value is the contentious point. To the IRS it is defined to have value. To me, it has no more value than the option, because there's no more market for those shares than there is for the options themselves. "Fair market value" is weird when there's no market.
Often companies offer the ability to "early exercise" options which means you buy them before they have vested and file with the IRS that you have done this. The reason you might do this is because the strike price of your options will likely be the same as "fair market value" of the stock. This means that when you buy them you do not pay any taxes since the difference is 0.
If you wait and exercise your options then you pay tax on the difference between the "fair market value" and your option strike price. This is taxed as a short term capital gain. However, you now hold the equity and if you sell it 1 year or later you pay a long term capital gain which is generally advantageous. This gain is the price you sell minus the value at the time you purchased.
Often, for people issued options they will exercise and sell immediately when/if the company goes public and they can sell. You keep the difference between what you sold them and what your strike is and you pay taxes on that profit.
The biggest issues are when you want to leave a company but have not bought your options. These are golden handcuffs and it's a decision you need to make if you want to buy them. For a company that is looking good you can often get a loan to buy them. But now you're invested in an illiquid investment of which you can't possibly know the real value. That's a big risk with potentially a large payout.