Expert: Gina Boykin - 10/17/2007

Question
I have a question regarding stock I recieved through other means than direct purchase.  First, I have some stock that was given to me by the company I worked for as part of the "signing bonus" if you will.  When I sell that stock how do I determine capital gains/losses?  Similarly, I received some AV stock when it was spun off of LU a while back.  How is capital gains/losses calculated when that is sold?

Answer
If you received actual shares of stock without any cost to you, they may be vested or restricted.

Vested means that even if you quit, you don't lose any portion or value of your stock.  Restricted means you have to meet some criteria (or a certain amount of time has to pass) to be able to sell the stock.

Let's say they are vested.
If so, the shares are considered income when you received them (just like if you had received cash in the amount of the same value).  You would pay ordinary income tax, based on the fair market value of the shares on the date you received them.  Your company has to withhold taxes, just like they would if you had a cash bonus, even though you did not receive any cash.  The stock value and the amount withheld will be on your W-2.  Your basis is equal to the value of the stock on the date of issue.

Once you sell, capital gains/losses are calculated on the difference between your basis and what you receive when you sell.  It will be long-term capital gains/losses if you wait at least 1 year and 1 day before you sell.  If you sell before then and have a gain, you will pay ordinary income tax on the gain.  Long-term capital gains have a better tax rate (15 percent) than ordinary income tax (which could be up to 35 percent)

If you have restricted stock, you are not considered an owner of the stock until the stock vests.  You will not have income until then.  Your basis will be the value of the stock when the stock vests.

On your other question, I am not sure how you received this stock that was spun off, (another job? a gift?) so I'm not sure how to answer this question.