For U.S. expatriation purposes, the valuation of stock options is reflected on Form 8854 (Expatriation Statement)and is determined based on specific IRS rules.
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The IRS requires covered expatriates to mark all assets to fair market value (FMV) on the day before expatriation (the “exit tax” date). This includes unexercised stock options, which are treated as if they were sold (deemed sold) for tax purposes.
Here’s how options are generally valued for covered expatriates under §877A:
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Valuation Methods for Stock Options:
- Incentive Stock Options (ISOs) & Non-Qualified Stock Options (NSOs):
- Exercisable (Vested) Options: Valued at intrinsic value (FMV of underlying stock minus strike price).
- Unvested (Non-Exercisable) Options: Valued using a lapse restriction model (similar to §83 regulations), often via Black-Scholes or another IRS-approved valuation method.
- Private Company Stock Options:
- If the stock is not publicly traded, valuation may require a qualified appraisal under §877A.
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Part VI (Deferred Compensation Items):
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- If the options are considered nonqualified deferred compensation, they may be subject to a 30% withholding tax unless an election is made under §877A(d)(1) to defer tax until exercise.
- The value is calculated based on the present value of the expected payout.
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Special Considerations
- Election to Defer Tax on Deferred Compensation Items (Including Options):
- Covered expatriates can elect to defer tax on unexercised options until they are exercised, but must provide a bond or security to the IRS.
- This is reported onForm 8854, Part VI, Section B.
- Net Worth Test & Tax Liability:
- The value of vested options is included in the exit tax calculation if the expatriate meets the covered expatriate criteria (e.g., net worth ≥ $2M, or average annual net income tax ≥ $2M, or average annual net income tax ≥ $190K for 2025).
The Service has outlined a methodology
The Service has outlined a methodology (Rev. Proc. 98-34) that taxpayers can use to value some compensatory stock options for purposes of determining gift, estate, and generation-skipping transfer taxes (GSTT). Rev. Proc. 98-34 applies only to the valuation of nonpubicly traded compensatory stock options on publicly traded stock.
Under Rev. Proc. 98-34, taxpayers may use a generally recognized option pricing model, such as the Black-Scholes model or an accepted version of the binomial model, when valuing compensatory stock options for gift, estate, or GSTT purposes. The selected model must, however, consider (as of the valuation date) the following factors:
(1) the option’s exercise price;
(2) the option’s expected life;
(3) the current trading price of the underlying stock;
(4) the expected volatility of the underlying stock;
(5) the expected dividends on the underlying stock; and
(6) the risk-free interest rate over the remaining option term.
The Service notes that several requirements must be satisfied in order for taxpayers to rely on Rev. Proc. 98-34. Those requirements include
(1) computing the option’s expected life in the manner outlined in Rev. Proc. 98-34;
(2) using the maximum remaining term as the option’s expected life on the valuation date if specified conditions are present;
(3) applying the option pricing model properly;
(4) using reasonable factors when applying the option pricing model;
(5) not applying a discount to the valuation produced by the option pricing model;
(6) computing the expected volatility factor of the underlying stock in the manner outlined in Rev. Proc. 98-34;
(7) computing the expected dividends on the underlying stock in the manner outlined in Rev. Proc. 98-34, and
(8) determining the factor for the risk-free interest rate in the manner outlined in Rev. Proc. 98-34.
Finally, the Service says, taxpayers who use the methodology outlined in Rev. Proc. 98-34 to value their compensatory stock options should write “FILED PURSUANT TO REV. PROC. 98-34,” on the applicable gift, estate, or generation-skipping transfer tax return.
