The Advisors' Blog

I’m loving this Forbes article from friend of the site Bruce Brumberg. Kids these days might think that acronyms were invented for texting, but the stock compensation crowd knows there is a whole language around awards & tax! The sheer number of definitions in Bruce’s article made me LOL. Here’s a sampling:

WYSIWYG: Types Of Grants

SBC: stock-based compensation, pay that involves company stock rather than cash.

ESO: employee stock option, a right that a company awards to purchase a specific number of its shares for a specified price (exercise price) and period (often up to 10 years). Employee stock options are different from listed or exchange-traded options.

NQSO or NSO: nonqualified stock option, the basic and most common type of ESO. NQSOs do not qualify for special tax treatment under the Internal Revenue Code (IRC).

He goes on to detail ISO, RSU, PSU, LTI, ESPP… you get the picture. Then this:

OMG: Taxes

OI: ordinary income. Salary, wages, interest, and types of income taxed at ordinary tax rates. Most forms of stock compensation generate ordinary income, and tax withholding applies.

CG: capital gain, income that arises from the sale of a capital asset, such as the sale of shares acquired from your equity comp. Capital gains and losses may be short-term (held 12 months or less) or long-term (held longer than 12 months). Short-term capital gains (STCG) are taxed at the rates of ordinary income. Long-term capital gains (LTCG) are taxed at 0%, 15%, or 20%, depending on your taxable income during the year.

AMT: alternative minimum tax. The alternative minimum tax system runs parallel to ordinary income tax. Under the AMT system, your alternative minimum taxable income (AMTI) is similar in concept to adjusted gross income (AGI) for ordinary income tax. When you exercise ISOs and hold the shares beyond the calendar year of exercise, the spread is part of your AMTI and you can trigger the AMT, depending on a number of other factors.

FICA: Federal Insurance Contributions Act. Together, Social Security and Medicare taxes are called FICA taxes because they are collected under the authority of the Federal Insurance Contributions Act. You know them from your paycheck and the Form W-2 you use for your tax returns. FICA taxes, also know as the federal payroll taxes, apply when you exercise NQSOs or SARs and at the vesting of restricted stock and RSUs.

FMV: fair market value. The FMV of a company’s stock is used to determine the amount of taxable income to report for an exercise of NQSOs and SARs and for the vesting of restricted stock/RSUs. The FMV is also used to set the exercise price of stock options on the grant date.

IRC: The Internal Revenue Code, possibly the most complex tax system in human history, is the body of legislation that governs all federal taxation in the United States, including the taxes that apply to stock compensation. For example, IRC Section 422 governs the taxation of ISOs, while Section 423 sets the rules for tax-qualified ESPPs.

Again, it goes on, and I imagine it’ll come in handy the next time my tax/benefits colleagues are throwing around their IRC lingo. Bruce’s “Stock Compensation Glossary” is also available in app form, with a “term of the day” & quiz!

– Liz Dunshee