An additional tax of 3.8% levied on realized capital gains for high-income earners.
Net Investment Income Tax
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Category: Glossary
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/gross value
See gross/net value.
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.
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.
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.
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.
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.
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.
Dive Deeper
Whether you’re just getting started or expanding your knowledge, here are some resources to get you started.
NEW! The Ultimate Guide to Equity Compensation
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NEW! The Ultimate Guide to Equity Compensation
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