Individual investors aren’t the only ones celebrating Nvidia’ s rapid ascent. The stock’s rise has been a boon to employees and insiders at the chip company who own shares. In 2024 alone, the stock has jumped more than 140%. Over the past three years, Nvidia’s share price has leapt nearly 580%. For long-time holders, parting with some of those holdings is leading to a windfall. Earlier this month, Tench Coxe, a member of Nvidia’s board, sold 100,000 shares with an aggregate market value of nearly $120 million, according to a filing with the Securities and Exchange Commission. He acquired the shares back in 1997, prior to Nvidia’s debut on the public markets, via a “purchase from issuer/option exercise,” per a regulatory filing . NVDA YTD mountain Year-to-date performance of Nvidia Though this is an extreme example of the wealth tech insiders can accumulate – and it certainly isn’t guaranteed – these sudden wealth events through equity compensation require considerable planning to manage the tax implications and to avoid overexposure to the company issuing shares. The latter suggestion is especially difficult for employees who have accumulated millions of dollars on paper and are tempted to continue taking the ride, even as their portfolio is heavily weighted toward their employer. “I was thinking of Nvidia and its employees and what it must be like to get stock options in companies that are up 570% in the last three years – and I love the idea of selling into strength,” said Blair duQuesnay, certified financial planner and financial advisor at Ritholtz Wealth Management in New Orleans. She is also a member of CNBC’s Financial Advisor Council . “You’re not going to sell your shares on the absolute top day for the stock, so what you have to do is come up with a strategy that allows you some discipline,” she said. Varieties of equity comp In the example of Coxe’s sale, it’s unclear what types of stock he was exercising. However, there are several different ways for employers to offer workers some equity. First, there are restricted stock units. So-called RSUs provide workers with shares at a future date following a vesting period of typically three to five years. Employees are subject to taxes once their holdings vest and they receive the shares. Employers can also offer incentive stock options, which allow employees to buy a specified number of shares at a stated – or strike – price. Though workers don’t pay taxes on the ISOs when they’re granted, they may be subject to alternative minimum tax the year they exercise the options. This AMT applies to the bargain element – that is, the difference between the strike price on the options and the fair market value of the stock. Workers who exercise their ISOs are also subject to capital gains taxes when they sell the stock they’ve purchased. If they follow a set of rules , including holding this stock for at least a year, they may get the preferential long-term capital gains treatment upon sale, a rate of 0%, 15% or 20%. Nonqualified stock options are another form of equity compensation. At exercise, recipients are subject to ordinary income taxes – which can have rates as high as 37% – on the “spread” or the difference between the fair market value and the strike price. There is a second tax hit – this time, capital gains – if the shares appreciate and are sold. Finally, companies may also offer employee stock purchase plans, wherein workers can buy shares at a discounted price – typically up to 15% – through a payroll election. Employees in these so-called ESPPs are also subject to certain holding periods before they sell. When to exercise, sell and diversify Though the decision of exercising stock options at work comes down to a case-by-case basis, a good time to exercise and buy might be when the stock is down slightly, according to Albert J. Campo, CPA and president of Campo Financial Group in Freehold, New Jersey. “What most financial advisors should be doing is setting up alerts for when the stock is down a couple of points, so that the bargain element is lower and it’s a little cheaper to exercise,” he said. “With ISOs, the question is ‘How do we expose you to as little AMT tax as possible?'” The timing of share sales is also key, as well as the amount sold. “If you’re realizing income, be aware of what tax bracket that will put you in at year-end,” said duQuesnay. “Sometimes the gains are so high, you’re going to be in the highest tax bracket and that can’t be avoidable.” Employees holding onto sizable equity compensation also have to consider whether their overexposure to their employer – who also provides their paycheck – subjects them to greater risk. In that case, it helps to coordinate with an accountant and a financial advisor to thin out some of those holdings through periodic sales and diversify their portfolios . Consider that pandemic darling Peloton Interactive saw its shares rise as high as $171.09 in January 2021. The company has been through considerable turmoil in the years that have followed, including slowing sales and layoffs. It ended Monday’s session at $3.64. “You hitch your wagon to something you hope is going to skyrocket, but then what if it bottoms?” said Campo. “Planning is key.”
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