Stock Options - clarification about selling

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sman09
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Joined: Fri Mar 23, 2018 12:02 am

Stock Options - clarification about selling

Post by sman09 »

I am not sure if calling the stocks awarded to employees (without the employee having to pay for it) as stock options is the correct term. or the term applies to only unvested stocks/shares.

We have some stocks of a former employer that were worth about $15,000 about 2 years ago (based on the statement we received from Merrill Lynch). It has dipped about 35% in value since.

Is it a good move to sell the stock and possibly expect some tax benefits (like TLH)? Even if there is no TLH benefit, we are okay with selling it and being done with it. One reason we hesitated to sell in 2020 upon resigning due to covid, was thinking there would be a short term tax (at a higher rate) on the gains and also the hope that perhaps if we just hold on to it, it may go up at some point.

Just wanted to confirm whether it is okay to do so and also to know whether it may not a smart move when it comes to stock options to lock in a loss?

the one other question (a very naive one at that) we have been having is - would we have already paid taxes on these stocks when they vested or would we be paying the taxes when we sell (for a gain) - is there anything even called selling for a loss when it comes to stock options - since all the stocks were awarded and not paid for?

I am sorry if the wording of the query is confusing or if i am using wrong terms to describe the issue.

Thank you for the guidance.
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FiveK
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Re: Stock Options - clarification about selling

Post by FiveK »

It depends on how they were "awarded". E.g., was the value of the shares included in your W-2 Box 1 the year they were awarded? If so, that sets the cost basis of the shares.

If not, maybe How to Report RSUs or Stock Grants on Your Tax Return - TurboTax Tax Tips & Videos will be helpful.
Topic Author
sman09
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Joined: Fri Mar 23, 2018 12:02 am

Re: Stock Options - clarification about selling

Post by sman09 »

Just to clarify on this part of the query as it sounds very silly for me to read it:

"the one other question (a very naive one at that) we have been having is - would we have already paid taxes on these stocks when they vested or would we be paying the taxes when we sell"

we used to gather all the documents (w2, interest, dividends) and share it with our tax preparer who would take care of the tax returns - given the uncertainty in our job situation we did not pay too much attention thinking the tax preparer would take care of it all.

To your query FiveK, we believe so. Because one of us had only about $15,000 in salary in 2020 but the W2 listed a higher amount possibly including the stock options as well. given that upon resigning some stocks were lost, would we have still paid taxes on them even though we did not get them in hand?

also appreciate any insights into whether it makes sense to sell these at a loss or better to wait and give it the time to recover.
mrb09
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Re: Stock Options - clarification about selling

Post by mrb09 »

Some terminology:

"Options" allow you to purchase stock at the price set at grant time. If the stock was up when you vested, you could make some money, and if was below the grant price, you make nothing. When you exercise, you owe taxes on the difference between the grant price and current value of the stick. Once you exercise the shares, you own them they would be treated as any stock with the basis as the current value when you exercised the options. Some brokers have a deal (like Fidelity NetBenefits) where you do a same day sale, they basically "loan" you the money to buy the shares, sell enough to cover "the loan" and taxes, and you get the rest in profit.

For "Restricted Stock Units (RSU)", you're granted a bonus and they vest every year. At vest time, you get the number of shares according to the vest schedule in the grant. Taxes are owed at that time on the number of shares * the current price of the stock. Once you pay that tax, then you own the stock and the basis is the price at the time of the vest.

In both cases you paid the tax (or should have paid the tax) when you got the stock, and the cost basis now is what it was at exercise or vest time.
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FiveK
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Re: Stock Options - clarification about selling

Post by FiveK »

sman09 wrote: Thu May 12, 2022 7:47 pm given that upon resigning some stocks were lost, would we have still paid taxes on them even though we did not get them in hand?
Really need nitty-gritty details on what happened when, and what information was sent to the IRS and reported on your tax return(s) to answer this.
also appreciate any insights into whether it makes sense to sell these at a loss or better to wait and give it the time to recover.
Assume you had the cash value of the stock, instead of the shares, in hand how. Would you invest the cash to buy shares at the current price?
Topic Author
sman09
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Joined: Fri Mar 23, 2018 12:02 am

Re: Stock Options - clarification about selling

Post by sman09 »

Thank you mrb09 and FiveK for your insights. That is very helpful.

Also, mrb09 thank you for these details:
"For "Restricted Stock Units (RSU)", you're granted a bonus and they vest every year. At vest time, you get the number of shares according to the vest schedule in the grant. Taxes are owed at that time on the number of shares * the current price of the stock. Once you pay that tax, then you own the stock and the basis is the price at the time of the vest.

In both cases you paid the tax (or should have paid the tax) when you got the stock, and the cost basis now is what it was at exercise or vest time."
Yes, they were RSUs as we recall. Good to have the clarification that taxes would have been already paid on them as they vested each year. So, in selling for a loss, we have essentially paid out tax on something we did not make any money - is that a correct way to look at it?

Thank you FiveK for this suggestion to decide
Assume you had the cash value of the stock, instead of the shares, in hand how. Would you invest the cash to buy shares at the current price?
we don't think we would invest the money into this company's stock if we had the equivalent cash at hand.


Thank you!
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