Unapproved share option schemes
Taxation of a short option
This option must be exercised within 7 years from the date it is granted.
Taxation on grant date
There is no tax due on the date that the right is granted. Your employer will report details to Revenue of the options granted to you.
Taxation on exercise date
When you exercise an option, you must pay Income Tax, Universal Social Charge (USC) and Pay Related Social Insurance (PRSI).
The Income Tax and USC due on the exercise of a share option is known as Relevant Tax on Share Options (RTSO). The amount of the gain is the difference between:
- the market value of the shares on the date you exercise the option
- and
- the amount you paid for the shares, plus any amount paid for the grant of the option.
Gains realised prior to 1 January 2024
You must pay RTSO within 30 days of exercising the option and complete a RTSO1 form. The 30 day period is inclusive of the exercise date.
You must also file an Income Tax Return (Form 11) for the year you exercise the option. You should include details of the RTSO already paid in the relevant section of the form. Your employer will also report details to Revenue of any options exercised by you.
Gains realised on or after 1 January 2024
If you realise a gain on a share option on or after 1 January 2024, your employer will account through payroll for the:
You will not have to file an Income Tax Return regarding this event.
Cashless exercise
You might ask your employer to sell your shares, rather than provide cash to exercise the option. If you do, this is known as a 'cashless exercise' or 'same day sale'.
You might do this in order to finance both the option price and the tax liability arising on exercise. The Income Tax position remains the same.
You will also need to consider any Capital Gains Tax (CGT) implications of selling the shares.
- Example 1
On 10 July 2021, Michael is granted an option to acquire 1,000 shares at €3 per share. The terms under which the share option was granted confirm that it must be exercised before 5 May 2026 (a short option).
As it is a short option, no tax is due on the grant of the option.
Michael exercised the share option on 1 March 2023. The market value of the shares at that date was €5 per share.
Calculation of the taxable gain on exercise of option
| Description | Calculation | Value |
|---|
|
Market value of shares at 01 March 2023
|
1,000 x €5
|
€5,000
|
|
Amount paid by Michael (option price)
|
1,0000 x €3
|
€3,000
|
|
Exercise gain
|
€5,000 - €3,000 |
€2,000
|
|
Income Tax (40%)
|
|
€800
|
| USC (8%) |
|
€160 |
| PRSI (4%) |
|
€80 |
| Total taxes |
|
€1,040 |
As Michael has exercised the share option before 1 January 2024, he must pay €1,040 to Revenue and file a RTSO1 form by 30 March 2023.
He must also file an Income Tax Return (Form 11) for the 2023 tax year by 31 October 2024.
- Example 2
On 10 July 2021, Michael is granted an option to acquire 1,000 shares at €3 per share. The terms under which the share option was granted confirm that it must be exercised before 5 May 2026 (a short option).
As it is a short option, no tax is due on the grant of the option.
On 1 November 2024, Michael instructed his employer to sell his shares. The market value of the shares at that date was €5 per share. He uses the sale proceeds to fund the option price and the tax liability on exercise.
Calculation of the taxable gain on exercise of option
| Description | Calculation | Value |
|---|
|
Market value of shares at 1 November 2024
|
1,000 x €5
|
€5,000
|
|
Amount paid by Michael (option price)
|
1,0000 x €3
|
€3,000
|
|
Exercise gain
|
€5,000 - €3,000 |
€2,000
|
|
Income Tax (40%)
|
|
€800
|
| USC (8%) |
|
€160 |
| PRSI (4.1%) |
|
€82 |
| Total taxes |
|
€1,042 |
As the exercise takes place after 1 January 2024, Michael's employer must pay €1,042 to Revenue.
Michael does not have to file a RTSO1 form.
As he has disposed of shares during 2024, he must file an Income Tax Return (Form 11) by 31 October 2025 with details of this disposal.
Taxation on assignment or release of share options
You must pay Income Tax, USC and PRSI on any gain realised on the assignment or release of a share option.
The amount of the gain chargeable to tax is the difference between:
- the amount you receive for the assignment or release
- and
- the amount you paid, if any, for the grant of the option.
If you receive a cash payment from your employer to release your share option, this is taxable. Your employer will make the necessary deductions through payroll and pay the tax directly to the Collector-General.
Next: Taxation of a long option