Are gains on exercising stock options subject to withholding tax? and Smoke stock blue

Are gains on exercising stock options subject to withholding tax?

Are gains on exercising stock options subject to withholding tax in the US for a non-resident alien?
Adding some more details - I'm asking about employee stock options given to me a few years ago... For a citizen of India, would the tax be 30% irrespective of anything or is there a reduced rate if W8BEN is filed?


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Answer by the tax lady
What kind of stock options?

NSOs and ISOs that do not meet the holding requirement will result in ordinary income. Ordinary income should be subject to 30% withholding. The actual tax would be reconciled when you file your 1040NR return.

Edit:
Here's the problem with ISOs. If you exercise and hold the stock through 12/31 of the year, you are subject to AMT on the paper gains. (AMT tax won't kick in unless the total of the spread is more than $ 33,750.) If you hold the stock at least 1 complete year, it's considered a capital gain and if you aren't in the US for more than 183 days that year, the tax rate is 0%.

If you do a same-day sale with an ISO, you need to see if you pass the holding period requirement (2 years from when the grant was issued). If you do, the gain is capital and only the 183-day rule applies. If you don't, the gain is ordinary and subject to withholding.

See IRS publication 525 for holding period rules.
Clearly I'd turn in a valid W-8Ben before casing in the stock.

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