How to treat a stock grant


B

bono9763

I was laid off my job at a publicly traded start-up biotech
company in December 2003. In lieu of my stock options I had
earned, the company gave me an equal value of stock in a
stock grant, effective 12/31/03. For example, if the
difference between my exercise price and the current price
was $1.00 and I had options on 10,000 shares, they would
have given me a grant of stock worth $10,000. These shares
are unregistered and I understand I can't trade them for two
years. A friend who also worked at the company told me I had
three choices on how to treat them (see below). I can find
support for choices 1 and 2 on the IRS website but not for
choice 3. Can anyone tell me if choice 3 is legitimate? The
stock trades over-the-counter usually at least once a week,
but not daily.

Thanks for your help.
Dennis

1. Include the value of the stock in my 2003 income and when
I sell the stock, any increase in value would be long-term
capital gains. I didn't do this, so this one is moot,
especially since I didn't file the right form within 30 days
of the grant.

2. When the stock becomes eligible to be sold on 12/31/05,
include it in my income for that year. Then when I sell, any
increase in value is long-term capital gains.

3. Declare the stock as having no value, don't include it in
my income. If I eventually sell it, all of the proceeds
would be ordinary income, not capital gains.
 
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A

A.G. Kalman

I was laid off my job at a publicly traded start-up biotech
company in December 2003. In lieu of my stock options I had
earned, the company gave me an equal value of stock in a
stock grant, effective 12/31/03. For example, if the
difference between my exercise price and the current price
was $1.00 and I had options on 10,000 shares, they would
have given me a grant of stock worth $10,000. These shares
are unregistered and I understand I can't trade them for two
years. A friend who also worked at the company told me I had
three choices on how to treat them (see below). I can find
support for choices 1 and 2 on the IRS website but not for
choice 3. Can anyone tell me if choice 3 is legitimate? The
stock trades over-the-counter usually at least once a week,
but not daily.

Thanks for your help.
Dennis

1. Include the value of the stock in my 2003 income and when
I sell the stock, any increase in value would be long-term
capital gains. I didn't do this, so this one is moot,
especially since I didn't file the right form within 30 days
of the grant.

2. When the stock becomes eligible to be sold on 12/31/05,
include it in my income for that year. Then when I sell, any
increase in value is long-term capital gains.

3. Declare the stock as having no value, don't include it in
my income. If I eventually sell it, all of the proceeds
would be ordinary income, not capital gains.
Item 1 would have been correct if you had made the election
in time. Item 2 is correct. When the stock vests you have to
declare $10,000 in compensation. This also becomes your cost
basis for future capital gains or losses. Item 3 is wrong.
 

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