Unapproved share option schemes
Taxation of a short option
This option must be exercised within seven years from the date it is granted.
Taxation on grant date
There is no tax due on the date that the right is granted. Your employer will report details to Revenue of the options granted to you.
Taxation on exercise date
When you exercise an option, you must pay Income Tax (IT), Universal Social Charge (USC) and Pay Related Social Insurance (PRSI).
The IT and USC due on the exercise of a share option is known as Relevant Tax on Share Options (RTSO). The amount of the gain is the difference between the:
- market value of the shares on the date you exercise the option
- amount you paid for the shares (plus any amount paid for the grant of the option).
You must pay RTSO within 30 days of exercising the option and complete a RTSO1 form. The 30 day period is inclusive of the exercise date.
You must also file an Income Tax Return (Form 11) for the year you exercise the option. You should include details of the RTSO already paid in the relevant section of the form.
Your employer will also report details to Revenue of any options exercised by you.
Cashless exercise
You might ask your employer to sell your shares, rather than provide cash to exercise the option. If you do, this is known as a 'cashless exercise' or 'same day sale'.
You might do this in order to finance both the option price and the tax liability arising on exercise. The IT position remains the same.
You will also need to consider any Capital Gains Tax (CGT) implications of selling the shares.
- Example 1
On 10 July 2019, Michael is granted an option to acquire 1,000 shares at €3 per share. The terms under which the share option was granted confirm that it must be exercised before 5 May 2024 (a short option).
As it is a short option no tax is due on the grant of the option.
Michael exercised the share option on 1 March 2021. The market value of the shares at that date was €5 per share.
Calculation of the taxable gain on excise of option
| Description | Calculation | Value |
|---|
|
Market value of shares at 1 March 2021
|
1,000 x €5
|
€5,000
|
|
Amount paid by Michael (option price)
|
1,0000 x €3
|
€3,000
|
|
Excercise gain
|
€5,000 - €3,000 |
€2,000
|
|
IT (40%)
|
|
€800
|
| USC (8%) |
|
€160 |
| PRSI (4%) |
|
€80 |
| Total taxes |
|
€1,040 |
Michael must pay €1,040 to Revenue and file a RTSO1 form by 30 March 2021.
He must also file an Income Tax Return (Form 11) for the 2021 tax year.
- Example 2
On 10 July 2019, Michael is granted an option to acquire 1,000 shares at €3 per share. The terms under which the share option was granted confirm that it must be exercised before 5 May 2024 (a short option).
As it is a short option no tax is due on the grant of the option.
On 1 March 2021, Michael instructed his employer to sell his shares. The market value of the shares at that date was €5 per share. He uses the sale proceeds to fund the option price and the tax liability on exercise.
Calculation of the taxable gain on excise of option
| Description | Calculation | Value |
|---|
|
Market value of shares at 1 March 2021
|
1,000 x €5
|
€5,000
|
|
Amount paid by Michael (option price)
|
1,0000 x €3
|
€3,000
|
|
Excercise gain
|
€5,000 - €3,000 |
€2,000
|
|
IT (40%)
|
|
€800
|
| USC (8%) |
|
€160 |
| PRSI (4%) |
|
€80 |
| Total taxes |
|
€1,040 |
Michael must pay €1,040 to Revenue and file a RTSO1 form by 30 March 2021.
He must also file an Income Tax Return (Form 11) for the 2021 tax year. He must report the disposal of shares on his Form 11.
Assignment or release of share options
You must pay IT, USC and PRSI on any gain realised on the assignment or release of a share option.
The amount of the gain chargeable to tax is the difference between the amount you:
- receive for the assignment or release
- paid, if any, for the grant of the option.
If you receive a cash payment from your employer to release your share option, this is taxable. Your employer will make the necessary deductions through payroll and pay the tax directly to the Collector-General.
Next: Taxation of a long option