Anyone have experience with US stock options?

[Ravlen]

I work for a US company, but with a corporate presence in Japan that is my direct employer (I'm Canadian, and a permanent resident of Japan). My company had it's IPO recently, and I'm wondering if anyone has any experience with:

- Exercising US stock options as a Japanese resident.
- Selling the actual stocks after they are exercised.
- Sending what could potentially be very large sums of money back to Japan.

Basically, from what I could figure out so far from google searches is:

- When I exercise, I'll have to pay taxes on the difference on the strike price vs actual current rate. So if the strike price is $5, and the actual market rate is $20, I pay tax on $15. This is common in most countries, but just double checking.
- There's no difference between long term and short term capital gains on stocks in japan, it's all ~20%, it seems? No need to hold the stocks for a year to get preferential tax treatment?
- It seems like when I then sell the stock, I only pay the tax on the increase compared to market rate when I exercised. So from the above example, if it goes from $20 to $30, then I sell, I pay tax on the $10 increase.

So I want to verify that the above points are correct... but then what? I'm assuming it's going to be complicated to do all this, because it'll happen in the US, but I need to pay the taxes in Japan. The US and Japan has some sort of tax agreement to let this happen without double taxation, I think?

Also, are there any complications about sending the money here? If I'm lucky, it'll be quite a significant sum, and I'll probably need to fill out some challenging paperwork beforehand?

My main plan is to retire here, and I'm not a US citizen, so I want to bring the money here and invest it here.

I'm scared that there are going to be a LOT of gotchas... I've got a friend looking for a skilled financial/tax expert that can help with this, but would love to hear from the RetireJapan community first!

Ravlen

[Tkydon]

Basically, from what I could figure out so far from google searches is:

- When I exercise, I'll have to pay taxes on the difference on the strike price vs actual current rate. So if the strike price is $5, and the actual market rate is $20, I pay tax on $15. This is common in most countries, but just double checking.

Yes, the initial gain is considered Payment in Kind and taxed at your Salary Marginal Income Tax Rate.
These are not qualified Japanese Stock Options which would be exempt from Tax on Exercise.

There are three ways to excercise:
1. Exercise for Cash - Your broker will exercise the Option to Buy the shares at the Strike Price, and then immediately sell the shares. You receive the difference between the Strike Price and the Market Price in Cash. You convert this to JPY and you pay tax on the amount of JPY at your Salary marginal income tax rate, probably 33% National, 0.693% Reconstruction and 10% Residential Taxes.
2. Exercise to Hold - You send the money to the broker to buy the shares at the Strike Price. The shares are put into your account. The difference between the Strike Price and the Market Price in still taxable as Salary. You convert this amount to JPY and you pay tax on the amount of JPY at your Salary marginal income tax rate, probably 33% National, 0.693% Reconstruction and 10% Residential Taxes.
3. Exercise to Cover - Your broker will exercise the Option to Buy the shares at the Strike Price, and then immediately sell enough of the shares to cover the cost of exercise, and transfer the remaining shares into your account. The difference between the Strike Price and the Market Price on all the shares, both the sold and kept ones, is not taxed in the US, but will be liable for Salary Taxes in Japan. You convert this to JPY and you pay tax on the amount of JPY at your Salary marginal income tax rate, probably 33% National, 0.693% Reconstruction and 10% Residential Taxes.

- There's no difference between long term and short term capital gains on stocks in japan, it's all ~20%, it seems? No need to hold the stocks for a year to get preferential tax treatment?

That is correct. Once you have exercised the options and paid the Salary Taxes, any gain over the Market Price on the day of exercise is taxed as Capital Gain. There is no difference between long term and short term capital gains on stocks in japan. Capital Gains Tax would be 15% National, 0.315% Reconstruction, and 5% Residential Taxes = Total 20.315%

- It seems like when I then sell the stock, I only pay the tax on the increase compared to market rate when I exercised. So from the above example, if it goes from $20 to $30, then I sell, I pay tax on the $10 increase.

Yes, that is correct. The Market Price on Exercise x Exchange Rate on Exercise = Tax Basis Per Share.
The Market Price on Sale x Exchange Rate on sale - The Market Price on Exercise x Exchange Rate on Exercise = Capital Gain

So I want to verify that the above points are correct... but then what? I'm assuming it's going to be complicated to do all this, because it'll happen in the US, but I need to pay the taxes in Japan. The US and Japan has some sort of tax agreement to let this happen without double taxation, I think?

Not complicated at all. The broker will do the transaction for you on your instruction. If 2. above, you need to put the money in the account beforehand.
You then have to file your Kakutei Shinkoku the following March, and declare the Option Exercise as Salary - Payment in Kind, and pay the taxes in Japan. Assuming this falls in the Y9M to Y18M band (check bands and rates), the 33.693% National and Reconstruction Taxes will have to be paid in one shot April. The 10% Residential Taxes will be included in your Residential Tax Withholding from your salary starting in July to June.
You will not be taxed anything in the US on the Exercise, as you are not a US Citizen. There is no US Withholding Tax on these transactions.

Also, are there any complications about sending the money here? If I'm lucky, it'll be quite a significant sum, and I'll probably need to fill out some challenging paperwork beforehand?

If you send more than JPY1,000,000 in one payment it will flag to the authorities. However, that doesn't matter as you're going to pay the taxes. There is no problem transferring the money to Japan. The broker will do the wire transfer for you on your instruction. Simple. If you have a Multi Currency account, they can wire the money in USD to your USD account, or they can wire the money in USD to be converted by your bank, or they can convert the money into Yen and wire the Yen for you. Exchange Rates might differ slightly...

My main plan is to retire here, and I'm not a US citizen, so I want to bring the money here and invest it here.

I'm scared that there are going to be a LOT of gotchas... I've got a friend looking for a skilled financial/tax expert that can help with this, but would love to hear from the RetireJapan community first!

No, no Gotchas. You really won't need a skilled financial/tax expert. It's really simple. When you go to file your Kakutei Shinkoku in March, you take the Gensenchoshuhyo Statement of Tax Withholding that your company will give you in January, and someone at the Tax Office will help you input the numbers from there in to the PC. You then add another line of Additional Salary Income from the same Company and you fill in the amount calculated:
(Market Price on the Exercise Day minus Strike Price) times No. of Shares Exercised times Exchange Rate on the Exercise Day.
And that is it.

If you sell the shares later, and there is Capital Gain, then it is a little more complicated and you will have to put the amount of the Capital Gain in Form B - Page 3. The calculation is:
(Sell Price times Exchange Rate on the Sell Day minus Market Price on the Exercise Day minus times Exchange Rate on the Exercise Day) times No. of Shares Sold.

And they will tell you how much tax you have to pay by April 14. You can give them your bank account details and they will automatically deduct the amount from your account, or you can pay by cash or transfer at the bank or convenience store.

When the Tax Bill comes through for the additional salary tax, you may have to sell more shares to pay the bill (Like Elon Musk )

Again, if there is Capital Gain, then you will have to put the amount of the Capital Gain in Form B - Page 3. The calculation is:
(Sell Price times Exchange Rate on the Sell Day minus Market Price on the Exercise Day minus times Exchange Rate on the Exercise Day) times No. of Shares Sold.

[captainspoke]

The people at JapanFinance might offer some ideas. Here's one thread.

[Ravlen]

@tkydon Thanks a lot for the detailed advice and @captainspoke for the link! I thought I replied with my thanks back when you both posted, but looks like I never clicked submit... Sorry, it was much appreciated!

Ravlen