Tax planning and compliance for investors
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A brief overview of compensation in stock and options.
Equity compensation is a large and somewhat technical subject. Before getting into gritty details you need to have an overall picture of how it works. We divide the subject into four areas summarized below. First, there are key concepts that apply to the entire area. Second, we look at compensation you may have when you acquire stock from an employer. The third topic is nonqualified stock options, and the fourth is incentive stock options.
It's worth noting that each topic builds on the previous one to some extent. You can skip around, but you'll find that the rules for incentive stock options build on the rules for nonqualified options, and those rules build on the rules for acquiring stock from an employer.
The following points are important in connection with all of the subtopics for equity compensation.
Special rules apply when you acquire stock from an employer. These rules apply also if you aren't an employee, but provide services in some other capacity such as a consultant or a member of the board of directors. You need to be familiar with these rules if you receive stock without paying (a stock grant or award), or if you buy stock in connection with your job.
The nonqualified stock option is a popular form of equity compensation.
If an option granted to an employee meets certain requirements, it's an incentive stock option or ISO. These options are available only to employees — you can't have an ISO if you're a non-employee director or consultant. They can provide special tax advantages to the option holder, but at the cost of great complexity and some tax disadvantage to the employer.
This summary omits many details that are spelled out in other pages of this online guide and in our books on the subject.
|That Thing Rich People Do|
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|Our complete guide to Roth IRAs and Roth accounts in 401k and similar plans: choosing, creating, building and using these accounts.|
|Consider Your Options|
|A plain-language guide for people who receive stock options or other forms of equity compensation.|
|Equity Compensation Strategies|
|A text for financial advisors and other professionals who offer advice on how to handle equity compensation including stock options.|
|Capital Gains, Minimal Taxes|
|Tax rules and strategies for people who buy, own and sell stocks, mutual funds and stock options.|