US Citizen Japanese company stock options tax implications

[um0k1e]

I'm a US citizen currently working at a Japanese start up. They are preparing to be listed soon and as a result considering implementing stock options/equity program for all employees. As a US citizen I'm a bit concerned with the whole PFIC and other tax implications this may have. Does anyone have any experience with this and whether it is worth it from a tax perspective to accept the options?

[Teflon]

As long as the company you work for is not a PFIC then the stock will not be taxed as a PFIC. For your US taxes, it only needs to be reported when you exercise the option. If you held the option for less than a year then any gains or losses are taxed as part of your ordinary income. If you've held the options for more than a year then your gains or losses are taxed as capital gains instead.

I'm not sure about how Japan taxes stock options but it's probably something similar. In any case, you could use the Foreign Tax Credit (FTC) to decrease or eliminate your US tax liability.

[TokyoWart]

I think there are two possible US tax issues for options. First the AMT can apply to your exercise of the option (the purchase of stock. There are many links about that but one calculator is here:
https://www.esofund.com/blog/amt-tax

Second, once you sell the stock acquired from option exercise that can be subject to long or short term capital gains taxes.

[Tkydon]

As for Japanese Taxes,

If, The Stock Options are granted on a Kabushiki Kaisha in Japan,
And, The Options don't Vest for a minimum of 2 years,
And, The annual total amount of the stock options exercised is less than Y12,000,000
And, The stocks or shares purchased by exercise are deposited with a specified Broker or Bank in Japan,

Then, the exercise is not subject to Salary Tax.

On sale of the shares, the Capital Gain above the Strike Price is taxable as Capital Gain (15% National, 0.315% Reconstruction, and 5% Residential Taxes). The Japanese taxes should be withheld by the Japanese Broker or Bank so, if you have paid the taxes by withholding, and the total amount of Capital Gains in that year is less than Y200,000, then you would not need to file a Tax Return at Kakutei Shinkoku.

If the Options do not conform to the requirements above (i.e. not a K.K., and/or Vest in less than 2 years, and/or greater than Y12,000,000, and/or not deposited into a specified Broker or Bank), then the Economic Benefit on the day of Exercise (i.e. the difference between the Strike Price and the Market Closing Price on the day of Exercise x No. of Shares), whether you sell the shares or not, is considered as Payment in Kind, and taxable as Salary at your marginal tax rate (X% National, 2.1% of X% Reconstruction, and 10% Residential Taxes). If your company reports this and withholds tax, you would not need to file at Kakutei Shinkoku.
This then becomes the Tax Basis. Any Capital Gain over the Tax Basis would be liable for Capital Gains Tax on Sale of the stock at the Capital Gain Tax Rate. This should be withheld by the Japanese Broker or Bank, so if you have paid the taxes by withholding, and the total amount of Capital Gains in that year is less than Y200,000, then you would not need to file a Tax Return at Kakutei Shinkoku.

If taxes have not been withholding, and/or the total amount of Capital Gains in that year is greater than Y200,000, then you would need to file a Tax Return at Kakutei Shinkoku.

[captainspoke]

This thread, and I think some others, over on reddit:
https://www.reddit.com/r/JapanFinance/c ... eed_to_be/

[Tkydon]

Just remember that Japanese Stock Options on a Japanese K.K. are treated completely differently than Stock Options on Foreign Companies overseas.
Also, Options are only a right to buy stock at a certain price in the future, and not the same as Restricted Stock Units (RSUs) that are full shares of Stock.

Say you were granted an Option to buy 1,000 shares at Strike Price $15 -

Exercise For Stock
If you want to exercise the Option and buy and hold the Stock when the market price is say $20, you have to Pay 1,000 x $15 = $15,000
and pay Tax on the $20 - $15 = $5 per share or $5,000 Economic Benefit.
If they are Not Qualified Japanese Options, then you need to pay Salary Tax on the Economic Benefit when you exercise at your Marginal Tax Rate (X% National, 2.1% of X% Reconstruction, and 10% Residential Taxes).
That could be a big chunk of change out of your pocket... $16,000~.
You would then own 1000 shares
If they are Qualified Japanese Options, then you only need to pay Capital Gains Tax 20.315% (15% National, 0.315% Reconstruction, and 5% Residential Taxes) when you sell the shares. Sell Price - $15 = say $5 per Share x No. Of Shares Sold = $5,000, so the CGT would be say $1,015.75 CGT.


You could Exercise for Cash.
If you want to exercise the Option for Cash when the price is say $20, you will receive 1,000 x ($20-$15) = $5,000 Cash Economic Value.
If they are Not Qualified Options, then you need to pay Salary Tax on the Gain when you exercise at your Marginal Tax Rate.
If they are Qualified Options, then you will have Capital Gains Tax withheld when you sell. $1,115.75

You could Exercise to Hold
If you want, you could exercise enough Shares for Cash in order to pay the costs to purchase the remaining Shares and Hold them and the taxes.
Amounts would depend on prices and taxes, but you may end up holding say 150 shares out of the 1000 for no out-of-pocket expense.
The proceeds from the Exercise for Cash of the 850 shares would cover the cost of buying the 150 shares and the Salary Taxes or Capital Gains Taxes.
You would then be liable for Capital Gains Taxes on the 150 shares when you sell them in the future.