Executive Compensation: The Taxation of Stock Options

The popularity of the stock option as a method of executive compensation results primarily from its favorable tax consequences. Under present law, an executive's ordinary income may be converted into capital gain. These discriminatory provisions provide a fertile field for tax avoidance. The first portion of this paper deals with the history of stock option taxation to date.

Much of the earlier law remains applicable. The historical perspective shows the wide latitude for avoidance and the faulty assumptions in which tax treatment has been grounded. The second part deals with the present tax treatment of stock options.