Here's an article on grant date FMV vs. purchase date FMV.

100% of stock options granted have a grant date fair market value (FMV). The FMV on this date is significant. It is the price the underlying stock would trade for on the day the options are awarded to the recipient. This value is used to determine the potential tax implications when the options are exercised. If the exercise price is lower than the grant date FMV, this difference may be taxed as ordinary income.

Conversely, purchase date FMV becomes relevant when the option recipient buys the underlying stock. This is the stock's market value at the time of the purchase. This is important to establish the cost basis of the stock. This cost basis is used to figure out the gain or loss when the shares are eventually sold. The tax paid is different depending on if it is short-term or long-term gains. Understanding both grant date and purchase date FMV is vital for making smart decisions regarding stock options and properly calculating any resulting taxes.

Expert opinions

Grant Date FMV vs. Purchase Date FMV Explained by Sarah Chen, CPA

Hello, I'm Sarah Chen, a Certified Public Accountant, and I'm often asked about the nuances of fair market value (FMV) as it relates to both grant dates and purchase dates, especially in the context of employee stock options (ESOs) or other equity-based compensation. Let's break down the differences and why they matter:

Understanding the Core Concepts:

• Fair Market Value (FMV): FMV represents the price at which an asset would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell, and both having reasonable knowledge of relevant facts. This essentially means the market price of the asset.

• Grant Date: This is the day on which the company grants an employee the right to purchase company stock or other equity. It's a crucial date because it often dictates the terms of the equity award.

• Purchase Date (or Exercise Date): This is the day on which the employee actually exercises their right to purchase the company stock. This is when the employee makes a decision to buy shares at the previously determined price, if applicable.

Grant Date FMV – Setting the Stage:

The FMV on the grant date is critical for several reasons:

• Determining the Strike Price (or Exercise Price): In the case of stock options, the grant date FMV often directly influences the strike price, which is the price the employee pays to buy the shares. Typically, the strike price is set at or above the grant date FMV, as setting it below this value would likely trigger immediate taxable income for the employee.

• Tax Implications (Incentive Stock Options – ISOs): For Incentive Stock Options (ISOs) in the U.S., the difference between the grant date FMV and the exercise price has tax implications. If the exercise price is at or above the grant date FMV, there is no tax liability at the time of the grant. However, the difference between the strike price and FMV on exercise and the difference between the sale price and FMV on sale can be taxed at capital gains rates.

• Tax Implications (Non-Qualified Stock Options – NQSOs): For Non-Qualified Stock Options (NQSOs), the difference between the grant date FMV and the exercise price has tax implications. The difference between the exercise price and the FMV on the exercise date is considered taxable income.

• Accounting for Equity-Based Compensation: Companies use the grant date FMV to calculate the expense they recognize for employee stock options under accounting standards like ASC 718 (for US GAAP) or IFRS 2.

Purchase Date FMV – The Point of Decision:

The FMV on the purchase date (exercise date) is also incredibly important:

• Assessing the Value of the Benefit: This is the price to determine if the benefit to the employee is worth the exercise. The employee compares the purchase price (the strike price) against the purchase date FMV to decide if they should exercise the option. If the FMV is higher than the strike price, there's potential profit, encouraging the employee to exercise.

• Taxable Income (NQSOs): For NQSOs, the difference between the strike price and the purchase date FMV at the time of exercise is considered taxable ordinary income.

• Capital Gains Tax (Sale Date): When the employee sells the stock purchased upon exercising the option, the difference between the purchase date FMV and the sale price will typically be subject to capital gains tax (short-term or long-term, depending on the holding period).

Key Takeaways:

• Grant Date FMV is foundational: It sets the stage for the option's terms and is essential for accounting and, to some extent, initial tax considerations.
• Purchase Date FMV is decisive: It determines whether the employee will exercise their option and, for NQSOs, triggers a taxable event.
• Understanding both dates and their respective FMVs is crucial: To assess the potential financial benefits and tax implications of equity-based compensation.
• Consult a tax professional: Tax laws and regulations surrounding stock options can be complex, so always seek professional advice tailored to your specific situation.

I hope this explanation clarifies the distinction between grant date FMV and purchase date FMV. If you have further questions, please reach out to a qualified financial or tax advisor.

Here's your FAQ content:

FAQ: Grant Date FMV vs. Purchase Date FMV

• Q: What is Grant Date FMV in relation to stock options?
  A: Grant Date FMV (Fair Market Value) is the price of a company's stock on the day an employee is granted stock options. This price is used to determine the "strike price," the price at which the employee can purchase shares.

• Q: How does the Grant Date FMV differ from the Purchase Date FMV?
  A: The Purchase Date FMV refers to the price of the stock when the employee exercises their options and actually buys shares. The Grant Date FMV is used to determine the potential profit, while the Purchase Date FMV is used to realize the profit.

• Q: Why is the Grant Date FMV important for tax purposes?
  A: The Grant Date FMV plays a key role in calculating the spread (difference) between the option price and the current stock price when an option is exercised. This spread can be subject to ordinary income tax.

• Q: What impacts the Purchase Date FMV?
  A: The Purchase Date FMV is subject to market fluctuations and company performance between the grant date and the exercise date. This can lead to significant gains or losses for the option holder.

• Q: Is the Grant Date FMV always the same as the Purchase Date FMV?
  A: No, the Grant Date FMV and Purchase Date FMV are rarely the same. The Purchase Date FMV is determined by the prevailing market price at the time of purchase.

• Q: What if the Purchase Date FMV is lower than the Grant Date FMV?
  A: If the Purchase Date FMV is lower than the Grant Date FMV, the stock option is "underwater." This means exercising the option would result in a loss, making it generally unfavorable.