Statutory definition

“Nonqualified stock options” is not a statutory term. Article 29-2 of the Act on Special Measures Concerning Taxation provides, for acquisition of shares through exercise of rights meeting certain requirements, that “the economic benefit relating to that acquisition shall be exempt from income tax.” The National Tax Agency Q&A uses “nonqualified” for options not eligible for that exemption. For the requirements, see What Are Tax-Qualified Stock Options? Please refer to.

“Where the issuing corporation grants rights listed in the following items that carry transfer restrictions or other special conditions (excluding grants in the capacity of shareholder, etc., limited to cases considered unlikely to harm other shareholders, etc. of the issuer), the value under Article 36(2) of the Act relating to those rights shall be the value of the shares acquired through exercise on the exercise date (for rights listed in item (iii), the due date for payment or contribution under those rights, or, where a payment or contribution period is specified, the date payment or contribution is made), less the amount specified in the relevant item.”

Article 36 of the Income Tax Act establishes the principle: “The value of the property other than money, rights or other economic benefits in the preceding paragraph shall be the value when the property or rights are acquired or the benefits enjoyed.” For rights to acquire shares granted by an issuer, Order Article 84 defines this “value” as the value of shares on the exercise date less acquisition cost and other prescribed amounts.

Overview

How is income classified: employment, business or miscellaneous income?

Income Tax Basic Circular 23–35 Common-6 governs classification upon exercise. For employment or similar relationships, it states: “Where rights are found to have been granted by reason of an employment contract or similar relationship between the issuer and grantee, the income shall be employment income. However, ... where benefits are found mainly unrelated to performance of duties, it shall be miscellaneous income.” For business-related grants: “Where rights are found to have been granted in connection with the grantee's business activities, the income shall be business or miscellaneous income.” Otherwise: “In cases other than (a) and (b), it shall generally be miscellaneous income.” The circular's retirement-income provision concerns rights to acquire shares at a favorable payment amount, rather than share acquisition rights. Nevertheless, gains on share acquisition rights may be retirement income under Article 30 if they have the nature of a payment arising from retirement. The National Tax Agency has classified as retirement income a case involving ¥1 options replacing retirement allowances, exercisable in full within ten days beginning the day after retirement.

Which year's income is it? Timing of recognition

Income Tax Basic Circular 23–35 Common-6-2 provides: “The time revenue is receivable for income relating to rights granted by an issuing corporation under the items of Article 84(3) of the Order shall be the date an application was made to acquire the shares obtained through exercise (where a person exercises rights under item (iii) and the application date is unclear, the application deadline for those shares).” The reference date is the application date, rather than the exercise date. The note states: “No tax shall be imposed where a grantee forfeits the rights by not applying to acquire the shares, withdrawing the application, or not making payment.”

How are rights on “particularly favorable terms or at a particularly favorable amount” prescribed?

Among rights covered by income tax Order Article 84, those issued pursuant to Companies Act Article 238 resolutions are limited by the parenthetical wording to rights “deemed on particularly favorable terms or at a particularly favorable amount to the subscriber, or deemed all or part of consideration for services or other acts.” The amount deducted from revenue is “the acquisition cost of the rights exercised plus the amount payable upon exercise.”

Article 84 separately covers “rights to acquire shares where the amount payable for the shares is favorable (excluding rights listed in the preceding two items).” Circular 23–35 Common-7's definition of a “favorable amount” concerns these rights and does not extend to share acquisition rights.

How does the National Tax Agency Q&A explain free or favorably priced grants?

Question 1 (free or favorably priced grants) of the National Tax Agency's “Taxation of Stock Options (Q&A)” states: “For salary in kind received from an employer, ... where it consists of transfer-restricted stock options (nonqualified stock options), ... income is not recognized at grant; it is taxed as employment income (note) for the year of exercise (income tax Order, Article 84(3)).” Note 1 states that economic benefits from options granted as consideration for labor by a controlling parent or similar entity are also employment income. Note 2 states that benefits from options granted as consideration for services under contracts for work or similar contracts are business or miscellaneous income, and are subject to withholding if they constitute remuneration or fees under Income Tax Act Article 204.

At exercise, “the economic benefit is 600: the share price at exercise (800) less the exercise price (200).” For withholding, see Stock options, tax withholding, and statutory reports. On transfer, it states: “Sale of shares acquired through exercise is subject to tax on share transfer gains.” The gain is “200: the share price at transfer (1,000) less the share price at exercise (800).” Articles 37-10 and 37-11 of the Act on Special Measures Concerning Taxation govern capital gains and other income from shares, etc.

Points that require care in practice

• Exercise after retirement does not change the income category merely because retirement occurred. Employment-related benefits are generally employment income. Consider retirement income where the payment arises from retirement, or miscellaneous income where benefits are mainly unrelated to duties. The grant circumstances and exercise conditions require individual examination.
• Assess the relationship between issuer and grantee based on its substance. Where overseas group companies are involved, also consult Taxation of foreign parent company stock options.
• The criteria in Circular 23–35 Common-7 concern rights other than share acquisition rights. The materials consulted contain no circular specifying criteria for whether share acquisition rights are on “particularly favorable terms or at a particularly favorable amount.” The original materials must be checked.

Legal basis

• Income Tax Act, Article 36(1) (Revenue) / Quoted wording: “Unless otherwise provided, the amount to be treated as revenue or included in gross revenue in calculating each category of income for a year shall be the amount receivable in that year (where received in property other than money, rights or other economic benefits, the value of that property, rights or benefits).”
• Article 36, Paragraph 2 of the Income Tax Act (Amount of Revenue) / Quoted text: "The value of things other than money, rights, or any other economic benefits under the preceding paragraph shall be the value at the time of acquiring said things or rights, or enjoying said benefits."
• Order for Enforcement of the Income Tax Act, Article 84(3) (Value of restricted shares, etc.) / Quoted wording: “Where the issuing corporation grants rights listed in the following items that carry transfer restrictions or other special conditions (excluding grants in the capacity of shareholder, etc., limited to cases considered unlikely to harm other shareholders, etc. of the issuer), the value under Article 36(2) of the Act relating to those rights shall be the value of the shares acquired through exercise on the exercise date (for rights listed in item (iii), the due date for payment or contribution under those rights, or, where a payment or contribution period is specified, the date payment or contribution is made), less the amount specified in the relevant item.”
• Order for Enforcement of the Income Tax Act, Article 84(3)(ii) (No heading) / Quoted wording: “Limited to rights deemed on particularly favorable terms or at a particularly favorable amount to the subscriber, or deemed all or part of consideration for services or other acts.” “The acquisition cost of the rights exercised plus the amount payable upon exercise.”
• Order for Enforcement of the Income Tax Act, Article 84(3)(iii) (No heading) / Quoted wording: “Rights to acquire shares where the amount payable for the shares is favorable (excluding rights listed in the preceding two items).”
• Act on Special Measures Concerning Taxation, Article 29-2(1) (Exemption, etc. for economic benefits relating to acquisition of shares through exercise of share acquisition rights received by specified directors, etc.) / Quoted wording: “The economic benefit relating to acquisition of those shares shall be exempt from income tax.”
• Act on Special Measures Concerning Taxation, Article 37-10 (Special taxation of capital gains, etc. on general shares, etc.) / Only the provision's location is indicated; its text is not quoted.
• Act on Special Measures Concerning Taxation, Article 37-11 (Special taxation of capital gains, etc. on listed shares, etc.) / Only the provision's location is indicated; its text is not quoted.

Relevant administrative guidance, Q&A, and cases

• Income Tax Basic Circular 23–35 Common-6 (Income classification where rights to acquire shares, etc. are granted) / Quoted wording: “Where the rights are found to have been granted by reason of an employment contract or similar relationship between the issuing corporation and the grantee: employment income. However, where exercise occurs after retirement and the benefits are found mainly unrelated to performance of duties—for example, rights granted to a person expected to retire shortly after grant that mainly provide benefits corresponding to share appreciation over a long period after retirement—the income shall be miscellaneous income.” “Where rights are found to have been granted in connection with the grantee's business activities, the income shall be business or miscellaneous income.” “In cases other than (a) and (b), it shall generally be miscellaneous income.”
• Income Tax Basic Circular 23–35 Common-6-2 (Timing of revenue from rights to acquire shares, etc.) / Quoted wording: “The time revenue is receivable for income relating to rights granted by an issuing corporation under the items of Article 84(3) of the Order shall be the date an application was made to acquire the shares obtained through exercise (where a person exercises rights under item (iii) and the application date is unclear, the application deadline for those shares).” “No tax shall be imposed where a grantee forfeits the rights by not applying to acquire the shares, withdrawing the application, or not making payment.”
• Income Tax Basic Circular 23–35 Common-7 (Where the amount payable for shares is favorable) / Quoted wording: “The phrase ‘where the amount payable for the shares is favorable’ in Article 84(3)(iii) of the Order means an amount below a value considered reasonable under generally accepted standards relative to the value of the issuer's shares under the circumstances on the date the payment amount is determined.”
• National Tax Agency, “Taxation of Stock Options (Q&A),” last revised November 2024, Question 1 / Quoted wording: “Salary in kind received from an employer is subject to income tax as employment income upon receipt. However, if it consists of transfer-restricted stock options (nonqualified stock options), income cannot be realized by transferring them, so income is not recognized at grant; it is taxed as employment income (note) for the year of exercise (income tax Order, Article 84(3)).” “Economic benefits relating to options granted as consideration for labor by a controlling parent or similar entity are also employment income.” “Benefits from options granted as consideration for services under contracts for work or similar contracts are business or miscellaneous income. Where those benefits constitute remuneration or fees under Income Tax Act Article 204, they are subject to withholding.” “The economic benefit is 600: the share price at exercise (800) less the exercise price (200).” “Sale of shares acquired through exercise is subject to tax on share transfer gains.” “The share transfer gain is 200: the share price at transfer (1,000) less the share price at exercise (800).”

Additional Authorities and Sources

• National Tax Agency, “Tax Treatment of Share Acquisition Rights Issued by a Parent Company upon Abolition of an Officers' Retirement Allowance System” (Income Tax Act, Article 30(1); Basic Circular 30-1)
• Income Tax Act (e-Gov)

Sources checked September 7, 2026.