Category: Glossary

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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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.

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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.

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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.

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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%.

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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.

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

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