Stock options grant an employee the contractual right to buy a set number of company shares at a predetermined price, known as the exercise or strike price, after a vesting period. If the market price exceeds the strike price at the time of exercise, the employee realises a gain equal to the difference. Options whose strike price matches the share price at grant are described as "at the money," while those below market value at grant are "in the money."
Two principal types exist in the US context: Incentive Stock Options (ISOs), which carry favourable tax treatment under the Internal Revenue Code for qualifying employees, and Non-qualified Stock Options (NSOs/NQSOs), which are more flexible but taxed as ordinary income at exercise. Outside the US, share option schemes are governed by local securities and tax law and vary considerably in their design and treatment.
In the Netherlands, stock options were historically taxed at the moment of exercise. The Wet werken aan winst amendment of 2023 (effective 2023 and relevant through 2026) introduced the option for employees to elect taxation at the moment of vesting rather than exercise for shares in unlisted companies, reducing the liquidity risk associated with paying tax on shares that cannot yet be sold. Dutch employers granting options must reflect the taxable moment in the loonbelastingadministratie accordingly.