The myStockOptions Blog

Two Special Tax-Return-Reporting Issues In 2023: Volatile Stock Prices And Employee Mobility

Over a decade passed between the Great Recession of 2008–2009 and the volatile market downturn of 2022. As a result, many younger employees with equity compensation—whether stock options, restricted stock units, employee stock purchase plans, and/or and company shares—are new to the impacts of fallen stock prices and capital losses in their tax-return reporting. For some, the 2023 filing season will be the first time they hear the terms "tax-loss harvesting" and "wash sales."

Another widespread issue for tax reporting that is new to many employees involves interstate employee mobility and the allocation of income between states. That is, of course, on the rise as more employees than ever work remotely in a different state from their employer, whether in one place or as “digital nomads” moving from state to state.

In a recent myStockOptions webinar on tax returns that I moderated (Preventing Tax-Return Mistakes With Stock Comp & Stock Sales), three leading financial and tax advisors with expertise in equity comp presented ideas and tips for preventing costly tax-return errors in 2023. This article summarizes some of the key points they made about capital losses, wash sales, and employee-mobility issues.

Down And Volatile Stock Prices? Consider Tax-Loss Harvesting...

Amid the down and volatile stock markets of 2022, many employees with stock comp have capital losses from selling company stock whose value fell after vesting, exercise, or purchase. On your tax return, you can apply your capital losses to offset your capital gains, thus reducing your taxable capital gains income. After that, you can also net up to $3,000 (for joint filers) of capital losses against ordinary income (e.g. your salary, income from RSU vesting, income from NQSO exercise). Any usused capital losses are carried forward. This is called tax-loss harvesting.

Webinar panelist Stephanie Bucko, a CPA and the co-founder of Mana Financial Life Design in Los Angeles, routinely uses this strategy to help reduce her clients’ taxable income on tax returns. “It definitely impacts the strategy. You can cut out a ton of taxes if you’re able to offset gains with losses.” She uses software to capture her clients’ full financial picture and also talks through their history to identify any capital losses that may be available to net against gains.

“It is likely for tax year 2022 that clients will have capital losses on their tax return,” Stephanie concluded. She pointed out that selling loss-makers can be useful not only to harvest the loss but also to diversify out of a concentrated stock position. “This presents an opportunity for clients with concentrated positions to reduce risk without suffering tax consequences. Our recommendation is to review Schedule D for these tax losses.”

Tax-loss harvesting is also pursued by webinar panelist Daniel Zajac, a CFP, Enrolled Agent, and managing partner of Zajac Group (Exton, PA). He noted that the volatile and declining stock prices of 2022 presented opportunities to take advantage of capital losses not only to offset any capital gains in 2022 but also to carry remaining losses forward to future tax years.

“In a year like last year,” Daniel went on, “I think that a lot of advisors were talking to clients about capturing some losses and carrying them forward. For many advisors that’s part of the process at year-end, and it’s funneled through to the tax preparer to be sure it gets accounted for.”

...But Watch Out For Wash Sales

Be aware that there are limits on tax-loss harvesting for those who try to be too clever with it. If you sold loss-generating stock before the end of 2022 for tax-loss harvesting and then repurchased the same stock in January to keep your investment in it, you will run into the “wash sale” rule. This is triggered by a sale of stock at a loss coupled with the repurchase of the same stock within 30 calendar days before or after the sale.

The result? Your capital loss is disallowed on your tax return for that year, with the basis and holding period added to the replacement shares that you purchase.

Most experts believe that option exercises, RSU vestings, and ESPP purchases are “buys” of company stock for tax purposes. You want to watch out for monthly RSU vestings, as these will trigger a wash sale if you have also sold company stock at a loss within 30 days before or after.

Your brokerage firm will usually track and report wash sales by account. However, it may not do this across different accounts that you (and your spouse) have at the firm and at other brokers. Therefore, you and/or your tax-return preparer must consider trading activity in securities across all the accounts you have.

“The first thing I try to do is to educate my clients to avoid the issue,” chuckled webinar panelist Dan B. Hodgin, a CPA and the owner of Silicon Valley Tax Group (Campbell, CA). “But obviously that can’t always be accomplished.”

How should you track all of this? First, he said, you calculate the number of shares sold during the year. “Sometimes it looks as if clients have wash sales throughout the year, but by the end of the year they don’t. They’re all netted out. But if they do in fact have wash sales that are going to carry to a future year, you really just have to do a manual calculation. There’s really no other way.”

You report on Schedule D the wash-sale amount, which may differ from the amount on the Form 1099-B you receive from the broker, Dan explained.

“In a future year, when those shares are sold that have an adjusted basis, you’re going to adjust in the opposite direction. You want to be sure you have full backup for that. In the year when you report the wash sale, the IRS is not going to bother you or question you. They will just see less of a loss, and that’s the end of that. But in the year when you have a bigger loss than the one on the 1099-B for that year, because you are adjusting for those previous wash sales that have now been cleared out, that’s when the IRS is going to have questions.”

Dan observed that many taxpayers haven’t experienced the issue of wash sales amid the rising stock markets of the past 10 years or so. “But with down markets and 80,000 new IRS agents, I’m going to be very careful with wash sales,” he stated. “I’m going to get a full inventory of shares and track those wash sales and the basis outside the brokerage account. If they’re not tracking wash sales on RSUs or ESPPs, then you have to. It’s the only way.”

“What if wash-sale RSU shares were sold in the same calendar year?” asked a webinar attendee. “If you generate a wash sale in February or March and then sell all the shares you have by December, I’m not going to put it in,” replied Dan. “The two are just going to wash each other out. I’m going to report it only if it has a net effect on the tax return at the end of the year.”

For more details on wash sales, see another recent myStockOptions blog commentary: Selling Stock At Year-End To Harvest Losses? Don't Get Tangled In The 'Wash Sale' Rule.

Remote Work And Digital Nomads: Issues With Employee Mobility

Generally, each state you live in determines what income is taxable and when. Many companies report income to and withhold taxes for only the state where you live when restricted stock units (RSUs) vest or when you exercise nonqualified stock options (NQSOs).

However, other states where you lived during the vesting period may contact you later if its tax officials learn of this stock comp income. The state’s tax authorities may seek a proration of your compensation income for your former residence, basing their tax on the part of the vesting period during which you performed services in their state.

The general rule for sourcing and allocating stock comp income is the number of days worked in the state divided by (for RSUs) the number of days between the grant date and the vesting, or (for NQSOs) the number of days between the grant date and either the vesting or exercise date, depending on the state rules.

In the myStockOptions webinar, panelist Dan Hodgin gave some key guidance for mobile employees. “Get a travel history for the current year,” Dan recommended. “Establish a residency history for the duration of the vesting schedule.”

This is important, he explained, because you can’t necessarily trust your Form W-2 on income determination. “Payroll department staff are not tax experts,” he cautioned, “and the complexity of this issue has grown exponentially since remote working became more readily available.”

State reporting of state-sourced wages on Form W-2 can vary, he added. “New York, for example, requires state wages to equal federal wages. Sometimes the year-end paystub can provide a more accurate state breakdown.”

Once you have your records in place, compare your fact pattern to your W-2, Dan advised. “If the W-2 does not match the fact pattern, ask your company to amend it. If you can’t get the company to amend the W-2, adjust the information on the tax return. Make sure you can back up your allocation with a strong fact pattern.”

With that fact pattern documented, you will be ready for any notice from the “aggrieved” state. He also warned employees to “be wary of low- or no-tax states versus high-tax states.”

Additional Tax-Reporting Resources

The 100-minute webinar in which these tax experts spoke, Preventing Tax-Return Mistakes With Stock Comp & Stock Sales, is available on demand along with many other on-demand webinars at the myStockOptions Webinar Channel.

For guidance on the tax-return reporting for stock compensation and sales of company shares, including annotated diagrams of Form W-2, Form 8949, Schedule D, Form 3921, and Form 3922, see the myStockOptions Tax Center.

Stock Options & RSUs: 6 Pro Tips For Navigating Volatility

For many of you who have equity comp, the extreme market fluctuations of 2020–2022 may be your first experience of volatility after a decade of rising markets. Know that it's normal to feel a little rattled. Sudden stock-price declines can stress out even the most experienced holders of stock comp (and their financial advisors).

Sooner or later, volatility may force you to make decisions that affect your financial future and long-term wealth. Should you change your financial plan or stick with it?

Financial strategies for equity compensation amid volatility and falling stock prices were dominant themes in two recent myStockOptions webinars. In one webinar on stock option exercise strategies and another on planning for restricted stock and RSUs, panels of financial advisors and tax experts discussed how to navigate volatility and down markets. This diverse group, including CFPs, EAs, and JDs, presented a variety of insights from different angles.

1. Listen To Your Risk Tolerance

David Marsh, a financial-planning case manager at Ameriprise (Minneapolis), pointed out in the stock option webinar that market declines offer a useful period to “confirm or reset risk tolerance.” In good times for your company’s stock price, he observed, it’s easy to be aggressive and bullish in your financial strategy. It’s harder to keep up that resolve when the stock price tumbles. In fact, he continued, a falling stock price can give you a helpful reality check on your tolerance for investment risk.

He suggests you listen to what your emotions in a downturn are telling you. “How much of a downturn are you willing and able to stomach, and how does that impact your goals? If you’ve been relying on equity comp to meet regular living expenses, that’s a real danger zone which comes to light in stock-price volatility and downturns.” Insights you derive from dark times for the stock price can help you re-examine your goals for share proceeds and re-assess the portion of them that is discretionary.

With nonqualified stock options, he went on, a reduction in the difference between the stock price and the exercise price may seem to create a tempting opportunity to exercise the options. That starts the holding period for the beneficial tax treatment on long-term capital gains at sale when the stock price eventually recovers. This is a common strategy for incentive stock options (ISOs).

However, with nonqualified stock options (NQSOs) there may be better uses for the same money. “You should compare whether to exercise and hold NQSOs or maybe just hold on to that option and put the cash to work in another way,” he advised. “Consider investment risk and tax factors. What I would bear in mind is that if you’re game enough to exercise NQSOs at this time, I would say let’s take that cash and simply buy more shares. If indeed the stock price does recover, by increasing the equity position in the company we may produce a better result.”

2. Welcome New Option Grants, But Have A Layoff Plan

Megan Gorman, the founder of Chequers Financial Management (San Francisco), complemented David’s thoughts in the stock option webinar with the fact that a depressed stock price is an excellent time to get new stock option grants. Playing a long game, she emphasized, is key to success with equity compensation. “If you go back to March 2009, when the stock market was miserable, it was an amazing time to get a grant with a very low exercise price,” she observed. The stock-price increases during the long recovery made option grants awarded at that time extremely wealth-generating.

But beware of layoffs, she cautioned. Option grants have finite terms and typically only very short periods when options can be exercised after job termination. “It’s important to have a strategy for exercising options and selling stock in the event you are laid off. In these more volatile markets, think about the fact that you are at risk of losing your job. Don’t lose the equity awards you worked so hard for.”

3. Don’t Forget The Big Picture, But Revisit Your Cash Position

Keep your big-picture financial goals in mind, advised Chloé Moore, the founder of Financial Staples (Atlanta), in the restricted stock/RSU webinar. “Things are a little volatile now, but keep a handle on your financial goals. Focus on what you can control: continue to build savings, pay off debt, and put yourself in a stronger financial position to shield yourself as much as you can from the impact of volatile markets.”

To that end, now is a good time to increase your cash position, she noted. “Your restricted stock units can help with this,” she points out. “That’s a good reason to sell the shares as soon as the stock vests.” If you’re using your RSUs to fund your lifestyle, it’s crucial “to revisit cash flow,” she asserted.

4. Try To Be Logical Rather Than Emotional

This is often easier said than done, but it’s an attitude worth reinforcing. In the RSU webinar, Meg Bartelt, the founder of Flow Financial Planning (Bellingham, Washington), addressed the irrational tendency to place too much importance on the grant price of restricted stock/RSUs. If the stock price falls between grant and vesting, this mental “anchoring” makes it easy to feel as if you’ve lost something.

“If you received Google RSUs a year ago, the much higher grant value is really depressing now,” she mentioned as an example. “Your projected comp used to be $500,000. Now it’s $300,000. But it’s important to remember that the $500,000 was literally never yours. The only thing that is yours is the number of shares, if you stick around long enough at the company. Be aware of that bias.”

Should you hold your RSU shares or sell them? The test for answering this question, Meg pointed out, “doesn’t change with the stock price.” Rather, she went on, it’s always this: “If you had cash of the same amount, would you buy stock in the same company?” If the answer is yes, you probably want to hold your shares. If the answer is no, you probably want to sell them. “The answer may change with the stock price and market conditions, but not the logical framework,” she emphasized.

Daniel Zajac, the managing partner of Zajac Group (Exton, Pennsylvania), brought up an alternative approach to minimize downside risk in volatile markets if you have both stock options and RSUs. Speaking alongside Meg and Chloé in the RSU webinar, he suggested doing an analysis to determine whether it makes sense for you to hold your vested RSU shares and instead exercise your options and sell those shares. That can safeguard the generation of proceeds you need for specific goals.

5. Watch Your Estimated Taxes; Look Ahead To Future Grants

Meg also observed that a big drop in income between last year and this year means that if you pay estimated tax to keep up with income spikes from RSU vestings, you should revisit how much estimated tax you’re paying. “Estimated tax vouchers for the current tax year are based on last year’s income. If you use last year’s estimated tax vouchers for this year’s lower income, you’re going to be way overpaying estimated taxes this year.”

The inverse is also true, she continued, should you lower your estimated tax payments this year. If the stock price goes back up next year, you want to be sure you’re not underpaying estimated taxes on the basis of your lower income this year.

Daniel echoed Meg’s observations by stressing the importance of “actively working with a CPA” to be sure that you’re neither overpaying nor underpaying estimated tax throughout the year, instead of simply relying on the safe harbors based on your prior year’s income. “If you have significant equity comp,” he stated, “you should be doing quarterly check-ins for estimated taxes.”

Daniel and the other presenters in the RSU webinar also pointed out that a fallen stock price presents new opportunities. If your annual equity comp grants are based on a percentage of your salary, “you may be getting additional shares because the stock price is lower.” This is good news to offset the bad news of a lower stock price.

6. Now Is The Time To Seek Professional Financial Advice

Bill Dillhoefer, the CEO of Net Worth Strategies (Bend, Oregon), which developed the StockOpter analysis tool, urges employees with equity comp in a downturn to seek advice from a professional financial planner, if they haven’t already. “When the stock price is going up, you may be getting advice from the watercooler chat and think you don’t need a financial advisor,” he said in the stock option webinar. Confidence is easy in bull markets. However, the game changes when stock prices tank and a bear market looms.

Bill emphasized how much a financial advisor can help you make better decisions and avoid mistakes with stock compensation. A good advisor can “establish and track diversification criteria based on risk.” He recommended understanding your “forfeit value,” a metric an advisor can calculate that shows the value lost if you leave your company to work for a competitor. Even if you’re generally confident in your knowledge of personal finance, advisors can help you “be a little more secure about lasting through these volatile markets without going crazy.”

Further Resources

The webinars in which these financial-planning experts spoke are available on demand at the myStockOptions Webinar Channel:

• Stock Option Exercise Strategies: Advanced Bootcamp
• Restricted Stock & RSU Financial Planning: Advanced Bootcamp

myStockOptions.com has other resources and tools on financial planning amid volatility and down markets.

RSU Grants At Amazon, Apple, Google Adapt To Help Retain Top Talent

Hiring competition, the Great Resignation, and stock-price volatility are prompting changes in longstanding stock compensation practices for key performers at big, established tech companies such as Amazon, Apple, and Google. Although grants at these tech giants are still more likely to be restricted stock units (RSUs) than the stock options that can be wealth-builders at tech startups, features of their new grants are evolving in an effort to retain top employee talent.

The changes that these industry leaders are making in their stock grant designs will be widely observed and may be emulated by other companies.

Amazon

One example is Amazon, discussed in an article from Bloomberg (Burnt Out Amazon Employees Are Embracing The Great Resignation) and other sources, including financial advisors who work with Amazon employees. The company is facing challenges with employee retention, for numerous reasons including a decline in its stock price since its high last July.

Amazon caps salaries for white-collar workers at a specified amount and then adds in stock grants that gradually vest in “steadily increasing chunks” over four years. In response to the tight labor market, the company just announced that it plans to more than double its cap on base salary, from $160,000 to $350,000 per year. According to an article from GeekWire, Amazon also stated that it will start making stock grants to employees when they are promoted, instead of waiting until the next annual grant cycle. Amazon’s announcement says the purpose is “to better align newly promoted employees with the compensation range of their new level.”

Further changes may also be coming in Amazon’s stock grant practices. Amazon’s RSUs currently vest 5% after the first year, 15% after the second, and then 20% every six months for the remaining two years. This is a backend-loaded vesting schedule. An article from Business Insider reveals that Amazon Web Services is considering a shift to a monthly vesting schedule for employees at Level 7 (principal) or higher and for approximately 15% of employees with a “top tier” annual performance review rating (see Amazon Considers Changing How It Distributes Employee Stock Options To Stem Exodus Of Top Talent).

Another article from Business Insider discloses an internal company memo stating that Amazon will allow employees to take longer leaves of absence before pausing their RSU vesting (Amazon Changes Employee Stock Distribution Policies After Exodus Of Top Talent And Complaints Of Slow Vesting Period). Previously, Amazon paused vesting for leaves of longer than two weeks for any reason, which is not a common practice. The Bloomberg article cited above adds that the company will now let vesting continue during parental leave and for up to 26 weeks of medical leave. Amazon will now also give employees the choice to trade fractional shares, and when an employee dies it will accelerate the vesting schedules for beneficiaries.

Apple

Apple has informed certain high-performing engineers (10%–20% in some divisions) that they will receive out-of-cycle RSU grants that vest over four years, according to a short news article from Fortune (Apple Is Doling Out Bonuses Up To $180,000 To Retain Top Employees). These grants are seen as a retention incentive to prevent defections to tech rivals. The grant values range from $50,000 to $180,000, with both the size and timing being atypical and surprising, the article claims.

The article also touches on the downside of these out-of-cycle types of grants, which are different than regular annual grants. They “irked” some engineers who didn’t get them and saw the selection process as arbitrary. Some grants equaled the annual stock grant normally given only to engineering managers.

Separately, Apple’s CEO received a new performance-based vesting RSU grant (performance stock units, or PSUs) on the 10th anniversary of his promotion to that position. See pages 44 and 50–52 of Apple’s definitive proxy statement filed with the SEC for his grant and others to executives, and also an article from MarketWatch (Apple CEO Tim Cook’s Compensation Rises To Nearly $100 Million Thanks To New Stock Award). These pay out stock based on the relative performance of Apple’s total shareholder return compared to companies in the S&P 500. For example, if Apple ranks in the 85th percentile of companies in the S&P 500 for the performance period, 200% of the target number of RSUs vest. For an explanation of the difference between time-based vesting RSUs, which were also granted at the same time to these Apple executives, and PSUs, see an FAQ at myStockOptions.com.

Alphabet/Google

Alphabet, the parent company of Google, is similarly finding the need to make larger grants to retain its top talent—see, for example, an article from CNBC, Alphabet Grants Tens Of Millions Of Dollars In Stock Awards To Top Execs. As detailed in Alphabet’s 8-K filing with the SEC on new compensation packages for four senior executives, including the CFO and the chief legal officer, each executive received stock awards valued between $23 million and $35 million, split between performance-based and time-based vesting RSUs.

The performance-based RSUs will vest from 2022 to 2024 according to total shareholder return (TSR) relative to companies in the S&P 100. The number of PSUs that vest will range from 0% to 200% of the target grant size. The time-based RSUs will vest quarterly in 12 installments, assuming continued employment at the company.

Business Insider reports that for all of its employees globally, Google has shifted to more front-loaded vesting for its RSU grants. Its RSUs used to vest evenly over four years (25% yearly). Now they vest 33% per year for the first two years, 22% in the third year, and 12% in the fourth. In comparison, most startup and pre-IPO companies tend to use a four-year vesting design in which 25% of the grant vests at the one-year mark, then monthly for the remaining term of continued employment (36 monthly vests after one-year cliff vest). I predict that more public companies will be tweaking their vesting schedules in various ways, including moving away from annual vesting to quarterly or monthly.

At Forbes.com, senior contributor Jack Kelly has a few insights on the RSU grants at Google for principal engineers. The author, a respected recruiter at one of the largest global search firms, emphasizes the importance of stock grants “that could potentially change your life” (Google Engineer Shares How They Made Over $1 Million In Total Annual Compensation: The Advice Applies To Everyone).

Underwater Stock Options

With stock markets in decline at the start of 2022 and IPOs underperforming, concerns about underwater stock options have resurfaced. Martin Peers, New York bureau chief and columnist at The Information, bluntly expresses both good news and bad news about the volatility in a recent article (Tech Stock Slump Hits 2021 Stock Comp). The good news? Grants made early this year will have “lots of upside.” The bad news? Last year’s grants. Even with RSU grants that do not technically go underwater (unless the stock price falls to $0), the value of grants at some companies has been substantially sliced.

In the author’s view, the big decline in tech stocks will have a widespread impact on employee compensation, and companies will need to address that in the upcoming months. He also wonders whether companies will take steps to make up for what employees lost by “beefing up” new grants to increase employee retention.

More Resources

See the extensive articles and FAQs at myStockOptions for more about restricted stock/RSUs and performance shares/PSUs, including their tax treatment.

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AdvisorFind Directory

Stock compensation raises many questions.

• How much should you contribute to your ESPP?
• When should you exercise stock options?
• Should you sell or hold restricted stock at vesting?
• How can you diversify your company stock holdings?
• How can you minimize your tax bill?
• How do you negotiate for stock compensation in your employment agreement?

While myStockOptions.com is a good place to learn about concepts, issues, and general strategies in equity compensation, at some point you may need an advisor to help with your unique situation. Yet finding a good advisor can be hard when you are busy and don't know where to start. The AdvisorFind Directory from myStockOptions.com is for you.

• Identify and contact an expert who can provide specialized professional guidance on equity compensation.
• Search for advisors by geographical area, type of advisor, years of experience, minimum portfolio size, and other key criteria.
• Look up resources for performing background checks on advisors.

Searching AdvisorFind is free and does not require registration at myStockOptions.com.

Equity Comp Pandemic Planning: Leading Financial Advisors Headline myStockOptions Webinar

Like all storms, both literal and figurative, the pandemic of 2020 will pass, but at the moment it's a wild ride. Like everything else, company approaches to equity compensation and the financial-planning strategies advisors must consider for clients are being heavily impacted by Covid-19 and its ripple effects.

After wild waves in the stock markets, financial planning for stock compensation continues to be tested by volatility, economic uncertainty, corporate layoffs, and indefinite employment furloughs. It is more important than ever for financial advisors to re-evaluate approaches in this planning niche. Client strategies that may have been ideal for the economic boom years may need adjustment or revision in the unprecedented circumstances of the novel coronavirus.

Webinar: Financial Planning For Stock Compensation During The Pandemic

This is the subject of a special one-hour webinar from myStockOptions on July 22. Bruce Brumberg, the editor-in-chief of myStockOptions, will moderate a panel discussion among three leading financial advisors and a top compensation consultant:

In this online event, leading financial advisors and equity comp experts will discuss how to reconsider planning for stock compensation and company shares amid Covid-19 and its fallout. Registration is open at the webinar homepage.

The webinar discussion panelists are:

• Meg Bartelt, CFP® (Flow Financial Planning)
• Tim Kochis, CFP® (Kochis Global, former CEO and Chairman of Aspiriant)
• C.J. Van Ostenbridge, CEP (Infinite Equity)
• Jane Yoo, CFP® (Jane Financial)
• Bruce Brumberg, discussion moderator (myStockOptions)

After explaining how companies are changing their stock grants, including trends in approaches to underwater stock options, the discussion will turn to what the pandemic and its impacts mean for financial planning. Key topics:

• what to do with vested stock options
• strategies for nonqualified stock options and incentive stock options
• whether to immediately sell restricted stock or restricted stock units when the grant vests
• whether to participate in an employee stock purchase plan, and ESPP benefits even in down markets
• special strategies for grants in private companies
• helping stock comp clients through layoffs, furloughs, and new job opportunities

The webinar offers 1.0 CE credit hour for:

• Certified Financial Planners (CFPs)
• Certified Equity Professionals (CEPs)
• CIMA and CPWA

Webinar Joins Related New Financial-Planning Articles

Many employees with stock compensation are facing tough choices with their equity grants and holdings of company shares.

• You may need to sell company stock for cash to meet living expenses.
• Your company's stock price has probably steeply declined and rebounded, going through volatility that makes you wonder about your equity comp and financial planning.
• You may have lost your job or been furloughed, or you may have changed jobs.

New articles at myStockOptions address these and other timely topics:

7 Things To Know When You Sell Company Stock To Raise Cash
For reasons beyond your control, you may find yourself in a position where you suddenly need to sell stock for cash to meet urgent living expenses. When selling stock you must always proceed with caution. Review this checklist of topics to understand on tax, company, brokerage firm, and SEC rules.

ESPPs Offer Special Benefits In Down And Volatile Markets
ESPPs cannot be "underwater" like stock options, but a declining stock price can have an impact on your plan participation and the tax consequences. This article explains what you need to know for participating in your company's ESPP with a falling or volatile stock price.

What To Do With Your Just-Vested Shares After Your Company's Stock Price Drops
Market volatility can rattle anyone's financial plan for stock compensation and company shares. What should you do with shares acquired from equity awards now? Sell them immediately? Hold them in the hope that the stock price will recover? Should you change the strategy you've been following? This article provides a financial planner's insights on how to consider these questions.

These articles join our longstanding expertise on equity comp and company stock during down markets in our sections on volatility and job loss.

ESPP Power: Market Turbulence Of 2020 Showcases The Unique Benefits Of Employee Stock Purchase Plans

Despite the torrent of market turbulence and volatile stock prices, many participants in employee stock purchase plans (ESPPs) have seen good returns in 2020. In fact, the stock-price volatility of 2020 provides a great example of why ESPPs are such a good deal. According to data from Fidelity Investments, employees with purchases in tax-qualified Section 423 ESPPs at the stock-price lows in March and April saw gains of over 40% by mid-June, after the market rebound. Read on for this rare good-news story of the current economic cycle.

Unique Benefits Of ESPPs

While there are various kinds of ESPPs, the most common type is known as a Section 423 plan, named after the part of the tax code that provides rules for it and the favorable taxation of the purchase discount. ESPPs with a purchase discount function a lot like stock options: employees get to buy company stock at less than the stock's market price. The features of these ESPPs include:

• after-tax contribution from your pay
• a set offering period when payroll deductions occur
• set purchase dates that use the accumulated deductions
• typically a discount on the stock-purchase price

With stock options, the exercise (purchase) price is the market price at the time of grant regardless of whether the stock price has fallen or risen since grant. Options can therefore be "underwater" if the exercise price is higher than the current stock price. By contrast, ESPP participation can never be underwater, as any discount comes off whatever the stock price is.

In fact, ESPPs with a discount and a lookback provision can even be a good deal even in a down market because you get the discount off either the start-date price or the purchase-date price, whichever is lower. Even if you do not have a lookback, you still get a discount off the market price on the purchase date.

Example: Your company uses a 15% discount with a six-month lookback.

• The offering date price is $10.
• The stock market price on the purchase date is $8.
• Your purchase price is $6.80 (85% of $8, not 85% of 10).
• In the price-drop example, your initial gain is 17.64% ($1.20 spread at purchase divided by $6.80 purchase price), before any change in the stock price after purchase

Data Shows Big Gains For Employees With Purchases In Down Markets

If the stock price then bounces back up after the purchase, ESPP participation can become very profitable. According to data from Fidelity Investments, employees at companies with ESPP purchases during the stock-price lows of March and April experienced meaningful gains of over 40% in the market rebound as of mid-June.

Of the Section 423 ESPPs that Fidelity Stock Plan Services manages for companies of varying sizes and industries, 48% of them had purchase dates for employees in March or April 2020, during the big stock-market decline. Fidelity looked at Section 423 plans with a 15% purchase price discount, both with or without a lookback, and quarterly or semiannual purchases that occurred in those months (i.e. purchase date every 3 or 6 months during the ESPP offering).

Fidelity found that, of those with lookback features, 32% of the companies used the offering-date stock price for the purchase-price calculation (i.e. stock price was still higher on purchase date), while 68% used for the calculation the lower price on the purchase date. Return on investment (ROI) for these employees in Section 423 ESPPs:

• All but two companies had positive ROI for employees as of June 17. At three companies, the price declined from the purchase-date stock price but positive ROI was still generated for employees based on discounted purchase price.
• At almost 96% of the companies, the positive ROI for employees in the ESPPs spans from 10%+ to 100%+ as of June 17 for those that held their companies’ shares.

With most ESPPs, you can withdraw from an offering or decrease your salary contribution percentage. Once the impact of Covid-19 hit the economy, it may have been tempting for employees to pull out of their ESPPs and use the money for immediate needs. However, Fidelity's data shows the wisdom of sticking with your ESPP, which can be an effective and disciplined form of investing at regular intervals, similar to dollar-cost averaging.

"Democratizing" Wealth Accumulation

For Emily Cervino, Head of Thought Leadership at Fidelity Stock Plan Services, Fidelity's 2020 ESPP data tells a very encouraging story about the significant wealth-building potential ESPPs present for employees at all levels. ESPPs can provide employees with some insulation from stock-market volatility when they have certain design features, she explained to me. “Thanks to the ESPP discounts and the market recovery, most of our [plan] participants have had impressive gains in their March and April purchases,” she added. “For many companies, the ESPP has been a bright spot in an otherwise difficult time.”

Another special aspect of ESPPs is that eligibility is usually companywide for employees at all levels. By contrast, at many public companies stock options and restricted stock units are granted only to certain employees and executives. Under the IRS rules for Section 423 ESPP plans, companies can exclude workers only for very specific reasons, such as being employed for less than two years. With broad-based participation, ESPPs can thus perhaps even play a small rule in reducing income inequality, including the racial wealth gap.

In Emily's words, ESPPs can therefore play a role in "democratizing wealth accumulation." These plans are not about executive compensation, she emphasized, as ESPPs provide the same financial benefit “from the very top to the very bottom of the organization.” Plus, as the coronavirus pandemic reveals the wisdom of stockpiling emergency savings, it is crucial to note that ESPPs can help employees build savings faster—whether by selling the shares to bank the cash proceeds or holding shares that keep going up in price.

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How Employee Stock Purchase Plans Can Offer Shelter In Down And Volatile Markets

Underwater employee stock options present a familiar predicament: grants in which the market price of the company’s stock is cheaper than the option exercise price make the options worthless, at least temporarily. Companies have well-established choices for dealing with this situation. But how do falling stock prices affect other forms of equity compensation?

Employee stock purchase plans (ESPPs) function a lot like stock options. You purchase your company’s shares, typically at a discount. However, there are key differences in their dynamics when the stock price declines. Sometimes an ESPP can still be a good deal even when the company's stock price falls.

Here's what you need to know for participating in your company’s ESPP with a falling or volatile stock price.

The Good News: ESPPs Can’t Go Underwater

ESPPs cannot be underwater in the traditional sense of having a purchase price greater than the current stock price. With an ESPP, the market price of the stock at the beginning of an offering does not completely control your actual purchase price, unlike with stock options, where the exercise (purchase) price is the market price at the time of grant.

In fact, ESPPs with a discount and a lookback provision for calculating it can be a good deal even in a down market. This is because you get to take the discount off either the start-date price or the purchase-date price, whichever is lower. If you do not have a lookback, you still get a discount off the market price on the purchase date.

Example: The stock price at the start of the offering is $14. The price on the purchase date is $10. The 10% discount is applied to the lower purchase-date stock price, resulting in a $9 purchase price. By contrast, if you had stock options that were granted with a $14 exercise price, a stock price of $10 would make the options underwater.

Volatility Does Not Always Matter

With most ESPPs, what matters is the stock price at the start of the offering period and on the purchase date. A big drop in the stock price during the offering period that mostly recovers before the purchase date does not affect your purchase price.

Example: Your company’s stock price is $14 on January 2, when the offering period starts. It falls to $9 by late March due to the impacts of the Covid-19 pandemic. On the purchase date six months after the offering start (July 2), the stock price has recovered to $13. The ESPP discount in the purchase price is taken off the $13 stock price on July 2.

The Bad News: Limits On The Amount Of Stock You Can Purchase

When your company’s stock price falls, you may not be able to purchase as many shares as you would like at the lower price. It depends on the amount of your payroll contribution (e.g. 10% of your salary).

With a tax-qualified Section 423 ESPP, under IRS rules you are allowed to purchase up to $25,000 worth of stock in a calendar year, though your company can set a lower limit. (For details about the $25,000 limit and how it works, see the related FAQ at myStockOptions.)

The value of your stock for this $25,000 limit depends on the stock’s undiscounted price when the offering begins, not at the purchase date. Let’s say your purchase discount is 10%, the stock price on the offering date is $20, and the stock price on the purchase date is $10. You can buy up to 1,250 shares ($25,000 divided by $20), not 2,778 shares ($25,000 divided by $9 purchase price). This can mean that your company refunds any amount contributed from your salary for an ESPP purchase over $11,250 (1,250 shares at $9 per share). However, if your payroll contribution for your ESPP is usually $11,250 or less, the lower share price does allow you to buy more shares than you would be able to if the price rose during the purchase period.

Special Plan Features In Down Markets

When its stock price falls by the purchase date, your company may have a rollover provision. During a long offering period (e.g. 24 months) with a six-month purchase period, a rollover automatically withdraws you and then re-enrolls you. This lets you take advantage of the lower lookback price, both for the $25,000 calculation and for when the market rises (hopefully) during the full offering period. This restart feature may be automatic or at the discretion of your company.

Alternatively, your company may have an automatic reset. This type of provision is also triggered when the market value on the purchase date is lower than it was at the enrollment date. The lower price on the purchase date is reset to become the lookback price (no new offering period started).

ESPP Benefits Are Worth The Complexity

For a detailed look at ESPP dynamics and tax treatments with a falling share price when you sell the ESPP stock, see the article Fundamentals Of Employee Stock Purchase Plans (Part 4): Down Markets And Other Tax Topics at myStockOptions.

As explained by The Great Benefits Of Your Company’s Employee Stock Purchase Plan, in any market conditions you should take full advantage of your company’s employee stock purchase plan. ESPPs offer an easy, efficient, painless, and rewarding way to pursue a disciplined savings plan and build your financial resources for the long term.