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For tax purposes, it is the price, based on the current market value determined by supply and demand, or a valuation method, for which a buyer and seller would willingly undertake a transaction. You need to know the fair market value to determine the amount of taxable income to report for the exercise of options and stock appreciation rights, and for the vesting of restricted stock. The FMV is also used to set the exercise price of your options on the grant date.
For a public company, the stock market sets the fair market value, which could be the average trading price for the day. With a private company, the fair market value measure is more subjective. It could be based on a recent round of financing or set by an outside valuation company.
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