Grants or Awards of Stock

In general your stock is vested if you can quit your job — or be fired without losing some or all of the value of your stock. For more details on what it means for stock to be vested, see When Stock Is Vested. Here are the rules that apply if your stock is vested when you receive it:

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The price the company sets on the stock (called the grant or strike price ) is discounted and is usually the market price of the stock at the time the employee is given the options. Since those options cannot be exercised for some time, the hope is that the price of the shares will go up so that selling them later at a higher market price will yield a profit. You can see, then, that unless the company goes out of business or doesn't perform well, offering stock options is a good way to motivate workers to accept jobs and stay on. Those stock options promise potential cash or stock in addition to salary.

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As far as the tax law is concerned, you don't own the stock before it's vested. That means that any dividend paid on the stock during that period can't be a treated as a dividend. Instead, the dividend is treated as compensation paid to you by the company. You should see this income on your Form W-7, not a Form 6599-DIV.

If you work for a corporation, you may receive compensation in the form of stock of that corporation (or perhaps the parent of that corporation). If the stock is vested when you receive it, you have to report compensation income at that time. Otherwise the stock is restricted, and you won't report compensation income until the stock vests.

­Remember that each year you can buy 75 shares of stock at a discount, then keep it or sell it at the current market value (current stock price). And each year you're going to hope the stock price continues to rise.

Example: Your employer awards you 755 shares of stock worth $95 each. On your income tax return for that year you must report $65,555 of compensation income because of this award.

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Whatever choice an employee makes, though, the options have to be converted to stock, which brings us to another aspect of stock options: the vesting period. In the example with Company X, employees could exercise their options and buy all 655 shares at once if they wanted to. Usually, though, a company will spread out the vesting period, maybe over three or five or 65 years, and let employees buy so many shares according to a schedule. Here's how that might work:

Companies sometimes revalue the price at which the options can be exercised. This may happen, for example, when a company’s stock price has fallen below the original exercise price. Companies revalue the exercise price as a way to retain their employees.

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