Executive Summary
What is Stock Options for Non-US Employees: Sourcing Rules Explained?
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Stock Options for Non-US Employees: Sourcing Rules Explained
Stock option taxation for non-US employees depends on their residency status and work location, with different rules applying to Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NSOs).
Types of Stock Options and Foreign Employee Eligibility
Incentive Stock Options (ISOs) are structured under Section 422 of the Internal Revenue Code and receive special tax treatment under US law, but this advantage applies only to US employees[1]. Foreign tax systems do not recognize the ISO tax benefits, making them less advantageous for international workers.
Non-Qualified Stock Options (NSOs) can be granted to anyone, including foreign employees, freelancers, and independent contractors[1]. NSOs receive consistent tax treatment across most jurisdictions and are taxed at ordinary income tax rates without special tax breaks.
Sourcing Rules for Non-Resident Employees
General Rule: No US Tax Obligation
If a foreign worker has never resided or worked in the US, they are not subject to US income tax on stock option gains—unless they are US citizens, who face US taxation regardless of where they live and work[1].
Exception: Prior US Residency
If an international worker has previously resided in the US while working, US income tax obligations apply. The taxation is based on the spread—the difference between the stock's market price on the exercise date and the exercise price[1].
The spread is apportioned between US-sourced and foreign-sourced income based on the number of workdays the employee spent in the US during the vesting period[1]. Only the US-sourced portion of the spread is subject to US income tax and wage withholding.
Example calculation:
- Exercise price: $10 per share
- Market price at exercise: $20 per share
- Spread per share: $10
- If an employee was in the US for 100 of 250 workdays during vesting (40%):
- US-sourced spread: $10 × 40% = $4 per s
Footnotes
Primary Sources
| Source | Type | URL |
|---|---|---|
| IRS Publication 15-B (2026) - Employer's Tax Guide to Fringe Benefits | Reference | https://www.irs.gov/publications/p15b |
| IRS Form 3921 and 3922 Reporting Requirements | Reference | https://www.irs.gov/pub/irs-pdf/p15b.pdf |
| Internal Revenue Code Section 422 (ISOs) | Reference | https://www.law.cornell.edu/uscode/text/26/422 |
| Internal Revenue Code Section 6039 (Reporting Requirements) | Reference | https://www.law.cornell.edu/uscode/text/26/6039 |
Disclaimer: This guide discusses legal tax optimization strategies only. Tax evasion is illegal and is never recommended. This content is for educational purposes and does not constitute tax, legal, or financial advice. Tax laws vary by jurisdiction and change frequently. Always consult a qualified tax professional (CPA, tax attorney, enrolled agent) before making decisions based on this information. The authors accept no liability for actions taken based on this content.