Gain on the exercise of stock options not considered gain on the sale of stock

Date 25 jun. 2010

In its verdict of 22 March 2010, the Eastern High Court determined that gain on the sale of stock options in certain circumstances should not be taxed as gain on the sale of stock, but rather as capital gains pursuant to rules for financial contracts.



A recipient had received stock options as part of the recipient’s employment at an American company. The recipient chose to utilize these stock options through a so-called “exercise and sell” transaction. An “exercise and sell” transaction means that the recipient exercised the options simultaneously with selling the stock to a third-party. Among others, the advantages of using such a method are that the recipient do not need to make any payment, and, thus, becomes entitled to the proceeds the same day the recipient chooses to exercise the options. Thereby, the recipient receives an amount equal to the difference between the exercise price and the sale price.


The Legal Basis

According to the Tax Assessment Act, certain stock option are taxable at the time of exercise, and not at the time they are received. The Capital Gains on Stock Tax Act applies to gains on the sale of stock. This type of gain is taxed as stock income. In addition to these rules, there are special rules applicable to taxation of gain on purchase and sales options, i.e. stock options. These special rules do not apply to contracts on the purchase and sale of stock, provided that the contract may only be performed by delivery of the stock, and provided the contract cannot be assigned. In conjunction with the enactment of these rules, it was explained that if the person exercising the stock option merely receives the difference between the exercise price and the sales price, the delivery requirement has not been satisfied. 


The High Court’s Verdict

The High Court first noted that the sale of stock that the recipient had received through the exercise of the option took place simultaneously with the exercise. Thus, the exercise and sale should properly be viewed as one transaction.


Since the recipient did not have to finance the ”exercise and sell” transaction, in that the recipient merely received the difference between the exercise price and the sales price, the High Court concluded that the recipient had never been the actual owner of the stock. Since the transaction was completed by the recipient receiving the just-described difference, the delivery requirement had not been met. Thus, the special rules applicable to the taxation of stock options applied, and the gain was, therefore, taxable as regular capital gains tax.



In the future, recipients of stock options must be aware of the method by which they choose to exercise granted stock options. An exercise through an “exercise and sell” transaction, as the one described above, will result in the gain being taxed as capital gain pursuant to the special rules applicable to the taxation of stock options. Such tax consequences are not, however, necessarily limited to the described transaction. If the recipient is not required to finance the exercise, or if the sale of the stock takes place as a natural and necessary part of the exercise, any gain will probably similarly be taxed pursuant to the special rules applicable to the taxation of stock option. This is not necessarily a bad thing, but it is important to be aware of these consequences.



If you have questions regarding the above or require additional information, please contact attorney Dan Moalem ( or senior associate Henning Hedegaard Thomsen (


The above does not constitute legal counselling and Moalem Weitemeyer Bendtsen does not warrant the accuracy of the information. With the above text, Moalem Weitemeyer Bendtsen has not assumed responsibility of any kind as a consequence of a reader’s use of the above as a basis of decisions or considerations.