Category: Glossary

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.

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.

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.

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.

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%.