Category: Glossary

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.

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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.

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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.

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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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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.

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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.

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Dive Deeper

Whether you’re just getting started or expanding your knowledge, here are some resources to get you started.

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