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Selling Stocks? What to Know Before Selling Company Shares

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 When selling company stock, it is essential to be aware of factors including tax implications, company rules, and regulatory requirements.

For some investors, selling company shares acquired through equity compensation or the open market is a great way to avoid being too heavily invested in one stock. However, before making a significant financial decision, you should navigate the process cautiously.

As financial advisors, we encounter clients considering selling company stock to diversify their portfolios and meet financial priorities. When selling company stock, it is essential to be aware of the various factors that come into play. These include tax implications, company rules, and regulatory requirements. 

Here’s a checklist to help you navigate the process of selling company shares smoothly:

What to Know About Capital Gains and Losses 

When selling company shares, you’ll incur either a capital gain or a capital loss. The calculation involves determining the sale proceeds compared to your cost basis. This includes any income recognized from equity compensation. Long-term gains, from holding shares for over a year, are taxed at lower rates. On the other hand, short-term gains are taxed at rates similar to salary income. Consider selling company shares strategically to offset losses against gains. And, of course, minimize tax liabilities.

How Identifying Share Lots Affects Taxes

If you’ve acquired shares at different times, such as through RSU vesting or ESPP purchases, it’s critical to identify the specific lot you intend to sell. Understanding how to specify lots, whether through FIFO (first-in, first-out) or other methods, can help optimize your tax situation when selling company shares.

Consider Avoiding Wash Sales 

It is often recommended that investors avoid wash sales. A wash sale happens when you sell shares of a company at a loss and then purchase more shares of the same company within a 30-day window. The U.S. tax code temporarily prohibits claiming a loss on the sale of the newly purchased shares, aiming to prevent exploiting tax loss harvesting for reduced taxes. This regulation ensures that the loss and holding period are transferred to the replacement shares.

Typically, any vesting of restricted stock or RSUs within 30 days before or after the loss sale qualifies as a wash sale, subjecting it to the associated rules. Similarly, the exercise of options, participation in an Employee Stock Purchase Plan (ESPP), or reinvestment of dividends in company stock are all regarded as purchases and are treated accordingly.

Reviewing Post-Termination Stock Options

Before you need to, you should ask, “What happens to my equity if I leave the company?” It pays to understand your company’s policies regarding the exercise of stock options. With job loss, vesting usually stops on all types of stock compensation. You must act quickly to exercise any outstanding vested stock options, typically within 90 days or less of your employment termination, or forfeit their value.

This Forbes article offers three key actions to protect your stocks. It notes that under the federal tax code, you have only 90 days to exercise ISOs after a standard job termination and still retain the special tax treatment that ISOs offer. However, if your company’s post-termination exercise period is shorter than 90 days, that is the specified period you have until expiration and forfeiture.

Understand Your Company’s ESPP Contribution Rules

An employee stock purchase plan (ESPP) lets employees buy their company’s stock — usually at a discount — on a set schedule. It’s best practice to familiarize yourself with your company’s ESPP rules. These rules include withdrawal options and contribution limits. While ESPP funds can provide emergency funds, consider contribution limits and potential refunds.

What to Know About Holding Periods

A holding period is the time between purchasing and selling an asset. Under ESPPs and ISOs, shares held for specific periods are subject to special tax treatment. Be aware of the implications of disqualifying dispositions and plan accordingly when selling company shares.

Insider Trading? Beware… 

Understand the legal implications of trading company stock based on material nonpublic information (MNPI). Compliance with securities laws and company policies regarding insider trading is essential to avoid legal consequences.

In addition to these considerations, staying informed about any changes in regulations or company policies that may affect your stock sales is critical. Agencies can be particularly vigilant about insider trading. Most publicly traded companies have set rules for “covered employees” that handle blackout periods (periods during which covered employees are not allowed to trade the company stock), and you should keep up to date on the blackout trading windows. 

Talk Through Major Financial Decisions With Your Advisor

Remember, it’s always advisable to consult with a financial advisor or tax professional before making significant financial decisions, especially regarding selling company stock. As financial advisors, Northern Lights Advisors helps clients make informed decisions that align with their financial goals and circumstances. 

By understanding the intricacies of selling company stock and navigating potential pitfalls, you can confidently navigate this scenario. And, while you’re at it, maximize your long-term financial well-being. Have questions about selling company shares? Reach out to a Northern Lights Advisor today.

The information in this article is not intended as tax, accounting, or legal advice. Read the full disclaimer here.