What Are Stock Options? And Do You Want Them?

The transfer of a NQSO to a charitable organization is not a taxable event to the employee. However, the exercise of the NQSO by the charity will create a taxable event to the employee. This is because the employee will recognize income when the NQSO is exercised, even though the employee no longer owns the NQSO and doesn’t receive the stock. When the charitable organization exercises the NQSO, the employee will recognize ordinary income equal to the fair market value of the stock when the NQSO is exercised over the strike price. Unlike the transfer of other types of appreciated assets, in which a transfer to charity will enable the donor to avoid paying tax on the appreciation, the transfer of an NQSO requires the donor to pay the tax even though the stock is held by a charity. To add insult to injury, the charitable income tax deduction appears to be limited to the employee’s tax basis in the NQSO. Because the employee does not recognize income when the NQSO is granted, the tax basis is, as a rule, zero.