ESO Alternative #1: Restricted Stock Units (RSUs)
Restricted Stock Unit Example
- Year 1: Jeremy receives 1,000 shares valued at $10 each and sells them immediately. He owes regular income tax on $10,000.
- Year 2: Jeremy receives another 1,000s shares valued at $10. He holds until the stock price reaches $15 a share, sells, and pays capital gains tax on that five-dollar difference. If Jeremy has held the shares for less than a year, he owes short-term capital gains tax. If he owns the shares for longer than a year, he owes the significantly lower capital gains tax.
- Year 3: Jeremy receives another 1,000 shares at a $10 share price. He holds, and the stock sinks to $5 a share. He now has $5,000 in capital losses he can use to offset any other capital gains. If he hasn’t got any capital gains, he can deduct up to $3,000 from his regular income tax obligation. Jeremy can roll the remaining $2,000 capital loss into the following year’s deductions.
ESO Alternative #2: Stock Appreciation Rights (SARs)
Stock Appreciation Rights Example
- Year 1: XYZ stock goes up to $15, so Maria exercises and receives a $500 bonus subject to regular income tax.
- Year 2: The stock price drops to $9 a share - Maria gets no additional compensation straight away, but she still has 100 vested Stock Appreciation Rights that she can exercise once the share price goes up.
- Year 3: XYZ stock explodes in value, reaching $30. She exercises Year Two and Year Three SARs simultaneously to get a $4,000 bonus.
Disclosures
Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client’s portfolio. All investment strategies have the potential for profit or loss. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author/presenter as of the date of publication and are subject to change and do not constitute personalized investment advice.
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Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client’s portfolio. There are also no assurances that any portfolio will match or outperform any particular benchmark. No content should be construed as an offer to buy or sell, or a solicitation of any offer to buy or sell any securities mentioned herein.