Sec rules backdating stock options

Restricted stock units aren't eligible for Section 83(b) election.

In granting an incentive stock option, a company grants the right to purchase a certain number of shares of stock at a fixed price.

This election taxes the employee immediately at the ordinary income tax rate for the full current market value of the grant, even though she could forfeit the award and pay tax on stock that's never received.

When the grant vests, the employee is taxed at the capital gains rate on the appreciation between the grant date and the vesting date.

Some executives have, well, at least when it comes to their stock options.

In order to lock in a profit on day one of an options grant, some executives simply backdate (set the date to an earlier time than the actual grant date) the exercise price of the options to a date when the stock was trading at a lower level. In this article, we'll explore what options backdating is and what it means for companies and their investors. Most businesses or executives avoid options backdating; executives who receive stock options as part of their compensation, are given an exercise price that is equivalent to the closing stock price on the date the options grant is issued.

When she sells the stock, she's taxed at the long-term capital gains rate on the difference in the purchase and sales prices.

If an employee doesn't meet the holding or employment requirements, the sale of the stock becomes a nonqualifying disposition.

(For more insight, see ) Although it may appear shady, public companies can typically issue and price stock option grants as they see fit, but this will all depend on the terms and conditions of their stock option granting program.That is, they grant their executives stock options with an exercise price (or price at which the employee can purchase the common stock at a later date) equivalent to the market price at the time of the option grant.They also fully disclose this compensation to investors, and deduct the cost of issuing the options from their earnings as they are required to do under the Sarbanes-Oxley Act of 2002.When the employee sells the stock, she's responsible for capital gains tax on the stock's appreciation.An employee who anticipates that a restricted stock grant will appreciate significantly during the restricted period can send a written statement to the IRS within 30 days of the grant to make a Section 83(b) election.

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