Review of Taxation Policy on Gains from Exercise of Share Options, Given Downturn in Startup and Technology Sectors
Ministry of FinanceSpeakers
Summary
This question concerns whether the taxation policy on gains from employee share options (ESOP) should be reviewed during market downturns, as raised by Mr Kwek Hian Chuan Henry. Deputy Prime Minister and Minister for Finance Lawrence Wong stated that ESOP gains are employment income, generally taxed based on the market price at the point of exercise. In cases involving a moratorium, tax is calculated using the share price at the time the restriction is lifted rather than the initial date of exercise. The Minister noted that employees should assess market risks before exercising, as subsequent share price fluctuations are treated as non-taxable capital gains or non-deductible capital losses. Therefore, the government will not adjust tax assessments if share values decline post-exercise, as such losses are regarded as private investment outcomes.
Transcript
45 Mr Kwek Hian Chuan Henry asked the Deputy Prime Minister and Minister for Finance in view of the current downturn in the startup and technology sectors, whether IRAS will review the taxation policy on gains from the exercise of share options, especially in situations where the value of stock options declines tremendously after the initial assessment of tax due.
Mr Lawrence Wong: Employee Share Options (ESOP) plans awarded or granted to an employee while he is exercising employment in Singapore is part of his employment income here. This is because such ESOP gains are gains derived by reason of his office or employment here. Like other employee benefits, an ESOP is considered part of the employee’s compensation package.
Generally, ESOP gains are taxable in the year in which the ESOP is exercised. The difference between the market price of the shares on the day of exercise of the ESOP and the exercise price paid for the shares, constitutes the employee’s employment income, which is subject to personal income tax. If there is a moratorium imposed on the selling of shares after the ESOP is exercised, the difference between the market price of the shares on the day the moratorium is lifted and the exercise price paid for the shares, constitutes the employee’s employment income, which is subject to personal income tax.
An employee should make an informed decision whether to exercise the ESOP, taking into account tax- and non-tax factors, including the future share price outlook.
After exercising the ESOP, the employee then chooses whether, and when, to sell the shares. If he sells them at a higher price than the exercise price, these incremental gains, which are capital gains, are not taxed. Correspondingly, if he sells the shares at a lower price, the capital losses will not be tax deductible.