Private stock options

I’m wondering if anyone has experience with private stock options and how the tax on gain above basis is handled with an Act 60 Individual Investor decree.

I have two different examples,

  1. Stock options were granted and vested state-side but exercised after moving into Puerto Rico. How would the income be handled on the gain in basis? Would this flow through on a W2 and be taxed as ordinary income (33%)? At this moment, I’m still an employee of my company.

For example, 409a exercise price was $10, new 409a was $100 when exercised, would the tax on the $90 gain be taxable as Puerto Rico W2 income? My understanding is that after exercising the option the bifurcation rules apply if the vesting happened state-side but I wasn’t sure about the income prior to exercising.

  1. My understanding is that if options were granted state-side but first started vesting while a PR resident there would be no tax on any gain once exercised and sold because they were “earned” while a PR resident. Is that correct?

I’m still waiting for my decree but moved my family here Dec 31st, 2020.

Assuming these are non-statutory options and not incentive options which would be treated as capital gains, typically you should only be taxed at the time you exercise the options and it would be treated as ordinary income and if the income was to you personally, not your company. Act 60 likely won’t apply as it’s not capital gains and not corporate income.

As a double whammy, several states have laws that specifically target deferred income and in a state like Georgia you would owe whatever percent of time you spent in Georgia between the grant date and execution date. You need to consult your accountant in whatever state you moved from and ask them what the applicable tax laws are there. The federal taxes you owe will follow whatever the state collects. This might be a good thing though as PR’s rates for income that doesn’t fall under the Acts are pretty high and you may owe less under the state you came from.

The Acts likely won’t help you. Some others have negotiated with their employers to sign a contract through their Act 60 company for a certain rate over the next year instead of executing their options. Of course you need a very tight relationship and trust with the company to do that.

As to when and how to have them vest, that’s something you’ll need to ask a MN accountant on as it will be state specific and fairly esoteric. Depending on how much income you are talking about… you still may want to do the simpler option to reduce your audit risk. The top rate is 33% in PR, but it graduates earlier, so unless you are talking well over $250k, your effective rate may or may not be better.