Shares acquired under a stock option plan that drop in price before you sell them will leave you with a taxable employee benefit and a capital loss. Unfortunately, the capital loss cannot be used to offset the tax effects of the stock option benefit. For example, if you acquire shares under a stock option plan for $25 when the market value of those shares is $100, the taxable benefit is $75 ($100 - $25). If the market value of the shares then drops and you sell them for $30, you will be left with a capital loss of $70. ($100 - $30) and taxes owing on the stock option benefit of $75. In extremely poor stock market situations, the taxes owing on the stock option benefit can exceed the proceeds from the share sale.
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