Approaches companies take
Can restricted stock go underwater?
Can you claim tax losses for underwater stock options?
Articles on volatility and down markets
Highlights of new content: stock option exchanges; netting trading losses against restricted stock income; year-end planning with tax increases ahead; ESPP strategies
AMT changes this year: income exemption amount and tax credit changes


Think Twice insider trading prevention videos: educate, entertain, and jolt your employees and executives (see and information below)

Find out why E*TRADE Corporate Services is the stock plan provider of choice for a quarter of the S&P 500 (see and information below)

NASPP Annual Conference For Corporate Stock Plan Professionals: Knowledge And Best Practices For Your Company And You (see and information below)


With the volatility and downturn in the stock markets, employees are wondering what they can do with underwater stock options as well as restricted stock and company stock that has dropped in value since exercise or vesting. has a special section about underwater stock options, and various articles and FAQs on down-market strategies and diversification, including strategies to consider at year-end.

The current uncertain stock-market environment makes our content and award-winning tools more valuable than ever for helping you understand and appreciate your stock grants, and how they fit into your overall financial picture. We would like to thank our members at all levels who continue to praise and preach the benefits of membership and licensing to their fellow employees, financial advisors, and compensation/HR/finance professionals. In addition to the many users of our site who have become Premium Members and Pro Members, many companies, stock plan providers, and financial advisors are also contacting us about:

  • Premium Memberships in bulk at discounted subscription rates
  • Licenses for our easy-to-integrate Knowledge Center of content and tools for HR and compensation portals and stock plan service providers' websites; our educational resources are particularly useful when employees and executives are new to restricted stock grants, or when vesting dates approach
  • Pro Memberships for financial and wealth advisors who need to track and model stock grants for multiple clients (includes innovative tools for client communications)

For more information on these corporate services, please email If you will be at the annual NASPP convention in New Orleans (October 21–24), please visit our exhibit booth.

~ Bruce Brumberg, Editor-in-Chief


Below are two frequently asked questions (FAQs) about market volatility, including the issues posed by underwater stock options. They are taken from the 700+ FAQs on All of these FAQs are available for your company to license or by Premium or Pro Membership. Please do not copy or excerpt this information without our permission.

Question 1:

What approaches to companies take to underwater stock options?


The approaches have included:

Radford Surveys + Consulting researched companies' exchange programs for underwater options. In a report released on August 8, 2008, the firm found that the most common treatments involve exchanging options for options (49% of companies) and exchanging options for stock (46%). Only 5% of the studied programs exchange options for cash.

The different alternatives raise concerns about accounting, dilution, securities law, shareholder approval under stock exchange rules, corporate governance, and investor relations. Unless your company's stock price was substantially overvalued at the time of your grant, apply a long-term view to your options and appreciate employee ownership. Your employee stock options probably have a 10-year term and are thus likely to prove valuable in the future.

To see actual examples from companies and more survey data on the structure of option exchanges, see the full FAQ.

Insider Trading Prevention And Education:
Think Twice Video And Intranet Series
Request free previews at

With insider trading cases in the news, now is a good time for insider trading education and focusing on your compliance program. The dramatic Think Twice video series will teach, entertain, and jolt your employees and executives about insider trading and securities fraud. Used by over 1,000 companies and developed with input from the SEC Enforcement Division, these powerful videos with memorable story-lines will drive home key points on

  • what insider trading is
  • the penalties and consequences
  • how the SEC discovers illegal activity
  • what happens if illegal tipping or trading is suspected
  • how SEC investigations are conducted

For more information on the Think Twice video series, and a free white paper on insider trading prevention and education, see Both VHS and DVD formats are available. Qualified corporate buyers, including pre-IPO companies, can request free previews. Intranet licensing is available.

Question 2:

Can restricted stock go underwater?


Not in the way stock options can. Restricted stock is worth the full market value of the stock when it vests (or, with restricted stock units, when shares are delivered). It does not matter if the stock price has dropped since the grant date. However, the value of the grant decreases (or increases) by the same percentage that your company's stock price does.

Example: You received a grant of restricted stock when the market price was $25 per share. The stock price has dropped 20% to $20 at vesting: the value of the stock you receive is $20 per share. Alternatively, if the stock price increases 20% to $30 at vesting, your stock is worth $30 per share. By contrast, if you receive stock options with a $25 exercise price, you have underwater options if the stock price is at $20 and a $5 gain if the price reaches $30.
The grant will lose value if the stock price drops, but the value cannot fall to $0 (i.e. go underwater) unless the stock price does. Since restricted stock always has value and usually does not require you to purchase it (there is no exercise price as with options), companies grant fewer shares of restricted stock (or restricted stock units) than stock options, as another FAQ discusses.

At vesting (or at grant if you make a Section 83(b) election), you pay taxes on the value of the shares you receive. When you sell them, you will have a capital loss for any drop in value after vesting.

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Question 3:

I have underwater stock options that are about to expire unexercised. Can I write these off as some type of loss on my tax return?


Wishful thinking! Just as you are not taxed on the value of the options at grant, you may not write off any expired unexercised options, whether they are underwater or in the money. Only when you exercise options do you trigger tax consequences.

Also, don't make the mistake of exercising underwater options and thinking you will then get an immediate tax loss. You need to sell the stock to get the loss, and even then the tax writeoff would not equal your actual loss on the sale. Another misconception is that exercising in-the-money and underwater options at the same time lets you net out the negative and positive spreads at exercise.

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Stomach Volatility In Your Company's Stock Without Losing Your Mind, by Joanna Glasner and Bruce Brumberg
Don't be discouraged by stock market volatility and underwater stock options. As the experts note, stock grants are tools for building wealth in the long term. Read this article free!

Stockbrokers' Secrets (Part 4): What I Tell My Best Clients About Down-Market Strategy, by W.E.B. Bantling
Market declines rattle even the most experienced stock option veterans (and advisors too). If you are less than fully prepared to cope with the emotional toll caused by an uncertain market, heed these ten tips.Read this article free!

Manage Your Expectations To Avoid The "Option Blues", by Loren Rodgers
If your company's stock price has dropped, leaving you with underwater stock options, you may feel let down. Your company's shareholders have had to face the same realities with their cash investment. Remember that you and your co-workers joined them as partial owners of your business when you accepted those options. Read this article free!

Content with the This is premium content symbol requires Premium Membership.

E*TRADE Corporate Services
offers full end-to-end support for all equity vehicles, including options, ESPPs, restricted stock, stock appreciation rights, and—coming later this year—performance awards. Whether you choose full or partial outsourcing, or in-house plan management, you will receive dedicated support, expert service, and product leadership. With 25 years of experience, E*TRADE Corporate Services knows how to meet the needs of your employees, your executives, and your auditors. Visit or email to learn more.


Here are more selections from's newest award-winning educational content. All of these are available to our Premium and Pro Members and our licensees:

Can income from restricted stock vesting be netted against your short-term capital losses from this year (or those that were carried forward from last year)? See the FAQ in Restricted Stock: Advanced.

New details on the structure of stock option exchanges, including survey data and examples: see FAQs in Basics: Underwater Stock Options.

Year-end tax planning with a new president and the likelihood of tax increases ahead. See the articles in Financial Planning: Year-End Planning.

With employee stock purchase plans (ESPPs), should your strategy at purchase be to flip or hold? See the article in ESPPs: Advanced.

Changes in the required information your company must give you on exercises of incentive stock options (ISOs) and ESPP purchases. See the FAQ in ISOs: Basics.

The Annual Conference Of The National Association Of Stock Plan Professionals (NASPP)

Must-attend event for individuals involved with the design, administration, accounting, and regulation of companies' stock plans.

The NASPP invites you to join us for our 16th Annual Conference, to be held October 21–24 in New Orleans. Building on our 16-year history as the premier event for stock plan professionals, the NASPP Annual Conference brings together industry luminaries to deliver fresh perspectives and cutting-edge guidance on the latest issues in executive and stock compensation. This year's Conference includes a full week of critical and timely sessions.

The 2008 Conference will focus on today's hot topics, including executive compensation disclosures, deferred compensation, stock option expensing, the latest administrative innovations, new opportunities in plan design, international developments and changing shareholder expectations. Each Conference workshop will deliver the real-world, practical guidance you need to respond to the latest regulatory changes.


Reflective of the industry's rapidly shifting regulatory landscape, this year's Conference will deliver both the high-level strategies and nuts-and-bolts practical guidance that companies (and their advisors) need to respond to new accounting developments, fundamental changes in tax law, and increased scrutiny of plan practices. Highlights of this year's program include:

  • All the current hot topics in stock and executive compensation, including a round-up of regulatory developments over the past year.
  • Current trends and new opportunities in stock plan design, including restricted stock and unit plans and performance-based awards.
  • The latest news in tax developments, straight from the IRS and Treasury.
  • What to expect for the 2009 proxy season and best practices for executive compensation disclosures.
  • Critical accounting developments, traps to avoid under FAS 123(R), and advanced financial reporting considerations.
  • The latest technologies and innovations in administrative practices.
  • Key international developments impacting overseas and globally mobile plan participants.
View all the Conference Workshop Descriptions and the full conference brochure at For those attending, visit the booth in the exhibit hall to learn more about our corporate services to help stock plan professionals and for company-wide stock plan education and communications.


We actively follow proposals, discussions, and changes in Congress related to the alternative minimum tax (AMT). These efforts include regularly discussing tax legislation with our congressional contacts. If you plan to exercise incentive stock options (ISOs), if you have an AMT credit from ISOs that triggered AMT, or if you have other income that triggers AMT, you need to know what Congress is doing to tackle the growing problem of AMT. To stay current, see our detailed FAQs on AMT reform and calculating AMT, which we update for every development.

AMT Patch For 2008

The AMT threat that Congress quelled at the end of 2006 and 2007 now looms again: for 2008, the AMT exemption amounts have returned to the low levels of 2000, potentially exposing over 20 million middle-income taxpayers to the AMT. Though some experts had predicted that an AMT patch for 2008 would not be passed till after the presidential election, on September 23 the Senate approved a broad tax bill (HR 6049) that includes setting the AMT exemptions for 2008 at $46,200 for single filers and $69,950 for married joint filers (see a summary of the bill's AMT portion). On the following day, the House passed its own more targeted bill specific to the AMT that sets the patch for 2008 at the same figures (see the brief full text of HR 7005). When issued this newsletter on September 25, our sources on Capitol Hill confirmed that the Senate was likely to approve the House's targeted AMT bill. If it does, President Bush would then almost certainly sign it.

Further Changes For Refundable AMT Credits

In a separate development, further changes may be ahead for the alternative AMT-credit rules that were passed in 2006 and amended in 2007. (These new rules concern large AMT credits that are more than three years old. For details, see a related article series and FAQ.) In addition to providing an AMT patch for 2008, the House's bill HR 7005 and the Senate's bill HR 6049 also include changes to the rules for AMT credits. As the prior paragraph states, HR 7005 is likely to be enacted. Earlier bills in the House of Representatives (HR 3861) and in the Senate (S. 2389) had bipartisan support, suggesting that there are no major political obstacles to the changes. Hinting at this possibility of additional reform, through September 30 the IRS temporarily paused its enforcement actions against taxpayers with AMT liabilities stemming from ISO exercises.

Prospects For Reform Under A New President

The next president, whether it is John McCain or Barack Obama, will need to address AMT reform. As Senators, both have supported the one-year patches for AMT relief, which increased the related income exemption amounts to save millions of middle-income taxpayers from being exposed to AMT. Mr. Obama supports indexing the exemption amounts for inflation (something the original AMT law, passed in 1969, did not provide for). Mr. McCain wants to "phase out" the AMT, though he has not said how he would offset the resulting loss of federal tax revenue. For details of the candidates' positions on various topics related to personal taxation, including the AMT, individual tax rates, and capital gains and dividends, see a special CCH Tax Briefing.

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