Broker Check

Monday Money Report

| April 12, 2021

Last week the market reached yet another all-time high.  We closed out the first quarter of the year with the S&P up 5.8%. The March jobs report was strong, both US and global economic forecasts have improved, and the reopening of much of the economy as vaccines are administered points to continued growth this year.    

Another area of growth we’re seeing is the number of companies that choose to issue stock in some form to their employees.  This can take the form of stock options or stock grants.  Both of these usually have some type of vesting period.  This period is a time when you have to remain working for the company and is a key reason companies offer these incentives – to retain talent.

A stock option gives you the right to purchase company stock.  They have a vesting date, often two to five years out.  Many option grants vest over a period of time, 1/3 each year for three years, or ¼ each year for four years. You can also have a cliff vesting, where the entire award vests at a single point in time.

When the option vests, it gives you the right to purchase the number of shares awarded for a set price, called the exercise price. If the company’s stock has increased in value between the time the option was awarded and the time it was exercised, you have a gain.

For example, in 2020 you were awarded 400 shares of Spacely Sprockets which will vest over four years, with an exercise price of $5 a share.  In 2021, Spacely Sprockets is trading at $6 a share. You would pay $500 dollars ($5 a shares times the 100 shares that vested this year) to purchase the stock, which is valued at $600. You just made $100.

Which is great, if you had the $500 to purchase the stock in the first place. What happens if you don’t have the money to exercise the option? You can perform a cashless exercise. You exercise the options, then immediately sell enough stock to cover the purchase price plus the taxes due.  For most options, that $100 gain, called the bargain element, is taxable as ordinary income. You can keep what’s left in company stock, or sell all of the stock and take the cash.

Given the tax ramifications, it’s wise to review the exercise of stock options with your tax professional and financial planner.  You also want to keep track of them, because they do expire.

Some options, referred to as Incentive Stock Options, qualify for special tax treatment.  There are a number of restrictions around these options and working with a professional is key to maximize the tax advantages, such as long-term capital gains treatment, and minimize the downsides, like AMT, or the Alternative Minimum Tax. Next week, we’ll take a dive into stock grants, RSU’s, and the 83(b) election.

Your action to take this week is to consider a personal article floater. Your homeowner’s insurance policy has limits on individual items such as jewelry, silver, art, firearms, and antiques.  A personal article floater provides additional insurance for these items, but may require a recent appraisal.

Our calendar of free educational events is on our website at  And for the month of April, we’re donating $5 for everyone new who likes our Facebook page to the All Children’s Chorus of Annapolis, a community choir that strives for vocal excellence, diversity in membership, and making a difference in the lives of children by teaching the rewards of hard work, team play and service to the community, up to $500.

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor. CovingtonAlsina and Great Valley Advisor Group are separate entities from LPL Financial.

All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

This information is not intended to be a substitute for specific individualized tax advice.  We suggest that you discuss your specific tax issues with a qualified tax advisor.

The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investment(s) may be appropriate for you, consult with your attorney, accountant, and financial advisor or tax advisor prior to investing.