Research finds that only 24% of employees have exercised their options or sold shares. Why? The most common reason is fear of making a mistake, mainly when it comes to tax implications. In other words, employees’ confusion around stock option taxation is preventing them from making a profit. That’s what we’re here to change, starting with a quick guide that will get things in order.  

TL:DR – a Summary Table

And now, for the details..

Under Israeli Law

Section 102

Section 102 of the Israel Income Tax Ordinance is relevant for employees and executives. Under 102, you are entitled to a decreased tax benefit – you will be taxed only 25% under capital gains tax, instead of up to 50% under your ordinary income tax.

At most companies, options need to be exercised within 90 days from when you leave the company or 10 years from grant date. If you prefer to wait, some companies will agree to let you wait if you waive your 102 tax benefits.

For this section to apply, the options must be placed in the hands of a trustee for 24 months from grant to sale. During this period, they can be exercised but not sold. It’s essential to pay attention to the timing of the sale and ensure that the trustee lock-up period is over. 

The taxable event occurs only when the options are translated into actual money, meaning upon liquidation. They are taxed at a reduced flat Capital Gains tax rate of 25%, and no Social Security payments apply.

Section 9.3 (3.ט)

Advisors and external service providers that receive options are taxed under section 9.3. Options are actually taxed twice; when they are first exercised and again upon liquidation.

The first taxable event is focused on the gap between your shares FMV (Fair Market Value) and your exercise price, which is taxed as ordinary income. The second taxable event charges 25% of the gap between the previous share Fair Market Value at your exercise date and the share selling price. 

Dividend Tax

Generally speaking, dividend tax depends on the type of stocks involved, whether or not the entity receiving the dividend is an individual or a company, the company type, and other factors. 

• Individual shareholder: 25%
• A significant shareholder (10% or more): 30%
• Family company: 25%
• A significant shareholder at a family company: 30% 
• Non-resident companies: 25% on Israeli-source profits
• Significant shareholders at non-resident companies: 30% 

Additional rules apply when other company types are involved, and each case requires thorough professional research. 

Surtax in Israel (“Wealth Tax”) 

An additional surtax of 3% applies to individuals who reach an annual income that exceeds 651,600 NIS/Year. This is a new and progressive tax bracket relevant only for the income over that specific amount. The surtax doesn’t depend on any other taxes paid by the individual. 

Israeli surtax applies to individuals, not organizations, whether employed or unemployed. It refers to the taxable income, excluding specific income types that are irrelevant under Israeli law. 

Under US Law

Even if you work for an Israeli startup company, if your options vested while working in the US, you will be subject to US tax. There are two possible routes, each one with its own limitations and advantages: 

Incentive Stock Options (ISO)

ISOs must be held for at least two years post-grant, and the shares must be held for at least one year post-exercise.

Option holders who meet these requirements will not pay taxes when exercising the options and instead pay 25% of the gap between their exercise cost and their returns from selling these shares, when the liquidation event occurs, after filing their taxes for the calendar year of the sale. 

Otherwise, the NSO taxation path applies.

Non-qualified Stock Options (NSO) 

NSO options are actually taxed twice; when they are first exercised and again upon liquidation. 

The first taxable event is focused on the gap between your shares FMV (Fair Market Value) and your exercise price, which is taxed as ordinary income. The second taxable event charges 25% of the gap between the previous share Fair Market Value at your exercise date and the share selling price.