LEARN | When to Consider Diversifying Concentrated Shares

Think of an RSU as cash compensation paid in the form of equity. Subject to insider trading rules, vested stock can be sold immediately upon vesting in order to diversify. For positions not sold upon vesting capital gains consequences should be factored in to the decision to sell. Vested shares with built-in gains can also be used to fund charitable giving.

Unlike ISOs, there is no tax benefit to holding shares acquired through NQSOs. NQSOs let the holder control the timing of the taxable event, but ordinary income tax on the full bargain element is triggered upon exercise which has the effect of shrinking the discount received on the stock. A cashless exercise of NQSOs and a subsequent contribution can be used to fund charitable giving.

Shares acquired through ISOs are attractive in taxable accounts because in a qualifying disposition, the entire difference between market value and discounted purchase price is taxed as long-term capital gain. However, beware of the possible Alternative Minimum Tax (AMT) consequences of holding these past the year of exercise.