Category: Glossary


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.

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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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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.

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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.

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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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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.

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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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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.

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Dive Deeper

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

Hi, I'm Daniel Zajac, CFP®, EA

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I write about equity compensation and employee stock options in a way that is easy to understand.