Glossary of Terms

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  • 83(b) election -

    You can file an 83(b) election to accelerate a taxable event on your stock options or restricted stock awards, so it occurs sooner than it normally would. Why would you do that? The primary reason to file an 83(b) is if you believe, by doing so, you will pay less tax now than if you wait and allow the options/awards to vest in their ordinary course. However, an 83(b) election may be a risky bet, as it’s possible you’ll end up paying income taxes on stocks you never actually acquire or sell.

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  • Alternative minimum tax (AMT) and AMT Credits -

    AMT is a parallel system for figuring how much tax you owe the IRS each year. You or your tax preparer calculate your annual taxes based on both standard and AMT tax structures, and then pay on whichever is higher. Usually, standard taxes apply. However, AMT may kick in when your income goes over a certain threshold or you engage in certain activities—including an exercise and hold on incentive stock options. On the flip side, after you pre-pay AMT taxes on an ISO exercise and hold, you may be able to recover some or all of the payment as an AMT credit in future tax years, often accelerating AMT credit in years when you sell qualified ISOs.

  • AMT Crossover -

    A calculation that projects the maximum number of incentive stock options that can be exercised and held in a given year without incurring AMT.

  • Appreciated/depreciated stock -

    When a stock has appreciated, it has increased in value since you acquired it. When a stock has depreciated, it has declined in value since you acquired it.

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  • Capital gains (short- and long-term) -

    When you sell a security for more than you paid for it (for more than its cost basis), the difference is a realized capital gain, subject to taxation if it occurs in a taxable account. If you sell shares within a year of acquiring them, it’s a short-term capital gain. If you sell after a year, it’s a long-term capital gain. Depending on your annual income, long-term capital gains are currently taxed at 0%, 15%, and 20% rates. Short-term capital gains rates range from 10%–37%.

  • Capital losses -

    When you sell a security for less than you paid for it (for less than its cost basis), the difference is a realized capital loss. If you incur losses in a taxable account, you can often use them to offset taxable gains in current or future tax years. However, doing so is subject to a variety of rules and restrictions. Consult with a tax planner as you proceed.

  • Cashless exercise/sell to cover -

    For stock options, a simultaneous exercise and sell of some or all of your exercised options that allows you to cover the cost of the shares and any subsequent taxes in a single transaction. A cashless exercise allows you to exercise your options without having to provide cash to fund the purchase. Instead, shares are sold from your exercise to cover the cost of the purchase and potential tax withholdings.

  • Concentration risk -

    When a significant percentage of your wealth is concentrated in a single position such as your company’s stock, you may be exposed to concentration risk—or the risk that the share price in this single holding could plummet, and take your overall financial well-being along with it. If your equity compensation concentration risks are too high, you may want to prioritize reducing them over optimizing tax-saving opportunities. diversification is a key strategy for reducing concentration risks.

  • Cost basis -

    Your cost basis in a stock or any other security is the price you paid for it, plus any qualified expenses you incurred such as a transaction fee. For example, if you exercised a stock option to purchase 1,000 shares of your company stock for $2/share, your basis would be $2,000. If a broker charged you $15 to place the trade, your basis would be $2,000 + $15 = $2,015.

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  • Depreciated/appreciated stock -

    See appreciated/depreciated stock.

  • Discount (ESPP) -

    A qualified ESPP may allow for employee participants to buy shares of stock at a discount of up to 15% from the purchase price.

  • Disqualified/qualified ESPP sale (or dispositions) -

    A qualifying disposition of employee stock purchase plan shares occurs if you sell your stock at least 2 years from the offering date and 1 year from the purchase date. Qualifying dispositions lead to preferential tax treatment and may allow for some portion of the gain to be taxed at long-term capital gains rates. A disqualifying sale of ESPP stock is anything that does not meet the qualifying standard. Gains from a disqualifying sale are often subject to various, higher tax rates.

  • Disqualified/qualified ISO sales (or dispositions) -

    A qualifying disposition of incentive stock options occurs if you sell shares at least two years past the ISO grant date, and at least one year past your exercise date. A disqualifying disposition is any sale that does not meet both of these requirements. Proceeds from a qualified sale are taxed at usually more favorable capital gains rates. Proceeds from a disqualified sale are subject to various, usually higher tax rates. However, by taking a qualified disposition, you may assume extra concentration risk. If the stock price drops in the year or so after you exercise your options but before you sell the stock, you may lose more in share value than the tax savings are worth.

  • Diversification -

    Well-built investment portfolios are spread across a wide range of diverse holdings. This typically means being invested across stocks and bonds, domestic and international holdings, various company sizes and book values, and other characteristics known to contribute to your portfolio’s overall risks and expected returns. Holding a significant position in a company stock or stock option reduces diversification, which means you may need to take extra steps to offset excessive concentration risk.

  • Donor Advised Fund (DAF) -

    DAFs are a special account type offering a simple, tax-advantaged way to engage in charitable giving. After establishing a DAF account, you can fund it with cash, in-kind stocks, and other assets, often taking a tax deduction on the fair market value of your contribution. You can then use DAF funds to distribute gifts to your chosen charities over time, while keeping the rest invested. As such, DAFs can offer a convenient and tax-effective way to donate low-basis company stock to charity. But be aware, once you contribute an asset to a DAF, the gift is irrevocable. It can only be distributed to qualified charities.

  • Double Trigger Restricted Stock Units -

    Restricted stock units are often taxed and shares delivered when they vest. For Pre-IPO stock, this presents a problem where the value of vested units will be taxable, and tax will be due, on pre-IPO shares that you cannot sell. A double trigger RSU adds a second component that must be met prior to RSUs being tax and delivered, often an IPO or other liquidity event. Only after both events occur will tax be due.

  • Downside risk -

    When you own company stock, there’s always the risk that its value could decline by a little or a lot. There are investment strategies to minimize this risk, although you can never entirely eliminate it. Most importantly, ensuring your total investment portfolio is diversified helps offset the potentially significant downside risk inherent in holding any individual stock.

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  • Early Exercise -

    A provision in an employee stock option agreement that allows you to exercise an employee stock option prior to the option vesting. An early exercise is often combined with an 83(b) election in an attempt to mitigate tax.

  • Employee Stock Purchase Plan (Qualified) -

    A qualified employee stock purchase plan allows employees to purchase shares of stock through convenient payroll deductions, often at a discount to the fair market value. Some ESPPs include a lookback provision, making a good ESPP potentially more attractive.

  • Equity compensation -

    A broad term referring to all forms of stock options your employer may offer you as an employee benefit. For example, equity compensation can be offered in the form of incentive stock options, non-qualified stock options, restricted stock units, restricted stocks, etc. Each type of equity compensation may differ in its tax treatment, as well as how and when vesting and exercise opportunities occur. The common goal is to reward you for a job well done and/or encourage you to remain an employee moving forward, while offering you a potential windfall stake if your company succeeds and its stock rises.

  • Equity/stock -

    If you exercise your stock options, you will receive purchase shares of company stock, or equity, which represent an ownership stake in your company. Once you’ve acquired stock, you own it permanently, whether or not you work at the company. As long as your company is publicly traded, you can sell your stock whenever you choose (subject to restrictions such as a blackout period or lock-up period) —again, whether or not you still work there.

  • Exercise (and hold or sell) -

    Once your stock options vest, you have the right, but not the obligation to exercise them. To exercise your options, you purchase stock shares at their exercise price, rather than their fair market value on that day. The lower your exercise price is compared to the stock’s fair market value at exercise, the better “discount” you’ll receive on your exercised shares. For example, say your exercise price is $1/share for 1,000 shares of company stock, which is currently trading at $5/share. You can purchase those shares for $1,000, even though they’ll be immediately worth $5,000. You can then continue to hold those shares, and hope the price continues to rise. Or, you could sell them, and pocket the after-tax difference.

  • Exercise date -

    The date on which you choose to exercise your stock options.

  • Exercise price/strike price -

    This is the per-share price you’ll pay if you decide to exercise your stock options. Your exercise price is usually set as the fair market value of the stock on your grant date. This means, as long as the stock increases in value, you get to purchase it at a discount when you exercise your options.

  • Expiration date -

    Most stock options have a finite lifespan, after which you lose the right to exercise them. Typically, the expiration date is a set number of years after the grant date—often 10 years—but it can be shorter. The document describing your equity compensation package should provide the specific terms for your company’s program.

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  • Fair market value (FMV) -

    The price at which your company’s stock is trading at any given point in time. If the stock is publicly traded, its FMV is whatever price it’s fetching on the public exchange. If the stock is pre-IPO, its FMV is may be determined by a 409(a) valuation.

  • Forfeit Value -

    A term to describe the future value of unvested RSUs, stock options, and other equity compensation that would be lost if you terminate employment.

  • Forfeiture risk -

    Until your equity compensation vests, you risk losing it, depending on the terms of the grant. For example, if you leave the company, you may forfeit the right to exercise options that have not yet vested.

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  • Grant date -

    This is the date your company grants you your equity compensation and establishes its terms—including how much time passes before you become vested in your options, as well as when the options expire if you don’t exercise them. Also, your exercise price is usually set as the stock’s fair market value on your grant date.

  • Gross/net value -

    These terms describe the value of an asset before and after accounting for taxes. An asset’s gross value is pre-tax; its net value is after.

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  • High-basis/low-basis stock -

    If your company’s stock price increases significantly from the price at which you acquired it, it’s considered a low-basis stock, because your basis is much lower than its current value. When the stock price does not increase much from the price at which you acquired it, it’s considered a high-basis stock, because your basis is nearly as much as its current value. From taxable accounts, it’s usually better to use low-basis holdings when donating in-kind shares to charity, because you’ll eliminate more otherwise-taxable capital gains.

  • Holding period -

    This term is used for several purposes. First, it describes the time you must hold your stock options before they vest. For this, the holding period typically begins on your grant date, and ends when specified in the terms of the grant (or potentially, when the company is acquired by another firm). It’s also used to describe how long you must hold a stock before its capital gains are treated as short- or long-term, as well as how much time must pass before an incentive stock option sale becomes qualified.

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  • In-kind donations -

    When donating the value of shares you own in company stock, you can sell the shares and donate the cash. Or you can transfer the shares “in-kind,” without selling them. If you donate low-basis, in-kind stock from a taxable account to a Donor Advised Fund or other qualified charity, neither you nor your recipients are subject to capital gains taxes on the appreciated stock. If you instead sell the shares and donate the cash, the gains become taxable income in the year of the sale.

  • Incentive stock options (ISOs) -

    Among available stock options, ISOs are often the most tax-advantaged, but potentially complicated options to manage, especially since they entail planning for alternative minimum tax (AMT) and AMT credit, and qualified/disqualified sales. They also typically require you to have cash available to purchase stock when you exercise your options. Describing availability, vesting schedules, tax treatments, maximum grants, 83(b) eligibility, termination agreements, and detailed cash flow considerations is beyond the scope of this glossary.

  • Initial Public Offering (IPO) -

    When a company completes its initial public offering, it transitions from being a privately held firm, typically owned by one person or a few individuals, to being a public company, owned by all its shareholders.

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  • Lookback Provision -

    A lookback provision allows the employee participant of employee stock purchase plan to purchase shares of stock at the better of the purchase date price or offering date price.

  • Low basis/high basis stock -

    See high basis/low basis stock.

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  • Net exercise -

    An option exercise in which a certain number of shares are withheld to cover the cost of taxes and/or the purchase price. The result is owning less shares post-exercise than the total amount of options exercised.

  • Net Investment Income Tax -

    An additional tax of 3.8% levied on realized capital gains for high-income earners.

  • Net Unrealized Appreciation -

    A tax strategy that allows you to transfer shares of company stock inside a 401(k) plan in-kind into a brokerage account. The cost basis of the stock is included as ordinary income in the distribution year, and any capital gain is subject to long-term capital gains rates.

  • Net/gross value -

    See gross/net value.

  • Non-qualified stock options (NQSOs) -

    Among various stock options available, NQSOs are relatively easy to understand, with more latitude to control the taxable impact, as compared to restricted stock units, by choosing when to exercise your options. That said, because proceeds are taxed as ordinary income at exercise, NQSOs may be less tax-efficient than ISOs. Describing availability, vesting schedules, tax treatments, maximum grants, 83(b) eligibility, termination agreements, and detailed cash flow considerations is beyond the scope of this glossary.

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  • Offering Period -

    Up to 27 months long for a qualified ESPP, the duration of time an employee can participate in a ESPP. A single offering period may include more than one purchase period, and offering periods can overlap.

  • Ordinary income -

    Broadly speaking, there are two main ranges of rates at which you pay personal income taxes (not including separate AMT calculations). Capital gains are taxed under one set of rates. Most other income is taxed as ordinary income. This includes your salary, bonuses, prize winnings, most retirement account withdrawals, etc. Under current tax rates and based on your total annual income, you typically end up paying a blended ordinary income tax rate between 10%–37%. Your ordinary income tax rate is usually higher than your long-term capital gains rate, which is why, given a choice, incurring capital gains is often preferred to generating ordinary income.

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  • Pre-IPO -

    Before your company has “gone public” by completing its initial public offering, any stock shares or stock options you may hold cannot be readily bought or sold—except potentially internally, or if your firm is acquired by another company who buys out your options. It’s also more difficult to discover the true fair market value, at which public buyers and sellers would be willing to trade on the stock. You may be able to, however, exercise stock options prior to an IPO.

  • Publicly Traded Stock -

    After your company has completed its initial public offering, its stock becomes publicly traded. You (and others) can buy and/or sell your company stock and track its current fair market value on a public exchange such as the Nasdaq or New York Stock Exchange.

  • Purchase Date -

    The predetermined date an ESPP uses contributions to purchases shares of stock for its participants.

  • Purchase Period -

    Often 6 months long, a purchase period is the time during which after-tax employee contributions are collected. A purchase period ends with a purchase date, when shares of stock are bought on the employees’ behalf (at the better of the purchase date price or the lookback price, if eligible, less an applicable discount). An offering period may have 1 or multiple purchase periods.

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  • Qualified/disqualified ISO sales (or dispositions) -

    See disqualified/qualified ISO sales.

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  • Realized/Unrealized -

    When the company stock you own is worth more (or less) than what you paid for it, the capital gain (or loss) is considered unrealized, or “just on paper.” If you sell some of your stock, you permanently lock in the trading price at the prevailing fair market value, creating a realized gain or loss. Generally, only realized gains/losses represent actual money being gained or lost, with actual tax ramifications. Because stock options are merely the right to buy stock, not actual stock, their value is inherently unrealized, essentially worthless until you exercise them.

  • Restricted stock awards -

    Similar in look and feel to RSUs, RSAs are actual stock that is held in escrow unit vesting and delivery occurs. RSAs are eligible for dividends and can be used in concert with an 83(b) election. Describing availability, vesting schedules, tax treatments, maximum grants, 83(b) eligibility, termination agreements, and detailed cash flow considerations is beyond the scope of this glossary.

  • Restricted stock units (RSUs) -

    A form of stock-based compensation that allows recipients to participate in company stock performance. RSUs often give employees value in the company but are often issued with a vesting schedule that must be met for the employee to receive the shares. Often upon vesting, the full FMV of the units are taxed as ordinary income, units are withheld to cover tax, and the remaining value is deposited as shares into a brokerage account. Describing availability, vesting schedules, tax treatments, maximum grants, 83(b) eligibility, termination agreements, and detailed cash flow considerations is beyond the scope of this glossary.

  • Risk tolerance -

    As with any investment, your equity and equity compensation entails various types of risk, including the risk that your company will underperform or even go under. In managing your company stock and stock options, it’s essential to factor in not just the risks themselves, but how personally tolerant you would be if they were realized. This involves analyzing your willingness, ability and need to take on the risks involved, and then managing them accordingly.

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  • Sell to cover -

    See cashless exercise.

  • Stock Appreciation Rights -

    A contractual right to receive the cash amount equal to the value of appreciated securities over a set price over a set period of time. Stock appreciation rights can be settled as cash or as shares of stock.

  • Stock lots -

    Stock (or equity) lots are “batches” of shares you’ve acquired on the same date at the same price. For example, let’s say you exercise some stock options on May 15, 2023, receiving 1,000 shares for $5.25 each. You exercise more options a year later, and receive 1,000 more shares for $7.33 each. Then, your company distributes a stock dividend in the form of another 50 shares priced at $7.45 each. You now hold three stock lots. When you sell some of your shares, you can designate which lots you’re selling from. This dictates the shares’ cost basis, as well as whether any capital gains are short- or long-term. Identifying specific lots can help manage the tax ramifications of a sale.

  • Stock options -

    A type of compensation that you may receive from your company that allows you to purchase shares of stock at a predetermined stock price. You can exercise your option to buy company stock at a specific exercise price, although you aren’t required to do so. In general, the hope is that your company stock’s fair market value will have increased by the time you are able to buy shares at your exercise price, thus receiving a deep discount on your purchase. Stock options generally come in two types, Non-Qualified Stock Options and Incentive Stock Options.

  • Stock origin -

    You may have acquired different company stock lots by exercising different types of stock options—such as restricted stock units, incentive stock options, and/or non-qualified stock options. Since each may impact the stock’s tax treatment differently, it’s important to consider the origin when holding, selling, bequeathing, or donating company stock.

  • Stock/equity -

    See equity.

  • Strike price -

    See exercise price.

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  • Tax-sheltered accounts -

    There are myriad accounts whose holdings receive tax-favorable treatment, such as your company’s 401(k) plan, traditional and Roth IRAs, 529 college savings accounts, health savings accounts, and others. Each type is subject to different tax treatments as you add or remove funds. But for all of them, interest, dividends and capital gains on holdings that remain in the account are not taxed along the way (nor can capital losses be used to offset the untaxed gains). For some account types, you do incur ordinary income taxes when you withdraw assets from the account. As always, your tax professional can advise you on the details.

  • Taxable accounts -

    Unless an account specifically qualifies for tax-favorable treatment, it’s a taxable account. For example, when you sell shares of a security held in a “regular” bank or brokerage investment account, capital gains are taxable; and capital losses can be used to offset those gains. Any dividends or interest earned on taxable account holdings are taxable as well.

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  • Unrealized/realized -

    See realized/unrealized.

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  • Vesting -

    When granted equity compensation, there’s usually a period of time that must elapse prior to the value becoming yours (for restricted stock units) or you having the right to exercise them (for stock options). Once you meet the requisite timeline, you are considered vested. Terms vary, but vesting typically occurs in stages. For example, 25% of your shares may vest after a year has passed, with additional amounts vesting monthly over the next several years. As your options vest, you can then exercise those shares if you wish, and purchase company stock. If you leave the company, you are likely to lose unvested shares; you may have a window of time during which you can exercise vested shares, after which you can no longer do so as a former employee.

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  • Withholding -

    When Restricted Stock Units vest and/or you exercise your Non Qualified stock options, your employer is likely to withhold value/shares from the transaction to cover your estimated taxes due. This is similar to paycheck withholdings to cover estimated taxes on your salary. Taxes are typically withheld at a Federal 22% tax rate (or 37% if it’s over $1 million in supplemental income) plus Social Security, Medicare, and state income tax, if applicable. To avoid facing an unpleasant surprise when you file your annual return, it’s important to work with a tax planner to ensure the withholding is sufficient, with no additional estimated taxes due.

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