Updated July 7, 2020:

Stock grants vs. stock options are different tools employers use to motivate and reward their employees. A corporation can get a tax deduction for letting employees become owners of a company when they follow the rules for letting them purchase stock or grant shares. In either case, employees get taxed on the stock value that's received. Those who receive stock grants can't sell their shares until a certain period of time, known as the vesting period. Shares that are received by using stock options can be resold at any time.

Stock Grants vs. Stock Options

It's essential to manage stock as part of an investment strategy, whether they're granted stock or options. These should be handled carefully. Grants and stock options should motivate employees to work harder, stay at work later, and assist with the appreciation of the company's stock. It's beneficial to the employee since the higher value the shares have, the more the employee will gain out of them. These two forms of compensation will also discourage employees from quitting their jobs until the options or stocks vest, as this is often conditional based on continued employment.

Stock and option grants allow some of the compensation to be deferred by companies. An advantage of these is the options and stock grants will cost the company more when there's a high stock price, but will cost the company less when the stock is low. This is due to the value of the stock grant and options package being tied to what the stock price is.

It can be risky to have options. There can be high gains, but they can also be worth nothing if things go bad. A stock grant's net worth is stable and won't go to zero until the company goes out of business. In order to balance the reward-and-risk profile of a compensation package, some options may be awarded in addition to stock.

Compensation

The worth of the shares that are given as a stock grant get taxed as regular compensation. The calculation of this often happens after the vesting period has occurred, since the employee isn't restricted from selling their stock anymore. However, an employee can choose to have the tax impact occur when the stock that's restricted is granted initially. An employee who has regular stock options will be taxed when they use their right to purchase stocks.

The value of stocks on the exercise date will be added to the compensation, with the purchase price for the stocks subtracted. This is known as the bargain element of stock options.

Tax Accounting

The term used to define the amount that's invested for the purposes of tax is known as basis. An employee's basis is the amount that was paid for shares in addition to any value that's taxed as compensation for both stock options and stock grants. The vesting date is often the starting holding date for stock grants. If an employee decides to have that value taxed on the grant date, that will become the holding period start.

Selling Stock

Sales of shares that are obtained from the exercise of stock options or stock grants result in capital loss or gain and are calculated as the difference between the proceeds of the sales, with the basis subtracted. The following rules apply:

  • Obtaining a gain from selling stock a year after the holding period starts gets taxed at a long-term rate that's favorable.
  • Short-term capital gain happens when the holding period begins a year after the sale of shares.
  • Capital loss happens when sale proceeds are less in value than the basis.
  • A maximum of $3,000 each year of capital loss gets deducted against other sources of income.

Incentive Stock Options

Incentive stock options are not the same as regular stock options. When exercising incentive stock options, there is not an amount that's taxed as compensation. When shares acquired through incentive stock options are sold before a year after exercise or before two years of the option grant, the bargain element will be taxed in the stock sale year as compensation.

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