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employee options/share grants are a tricky will prob want to check with the company to be sure how to handle them, because the type that they are - and only the co can tell you that for sure - will detemine how they are handled.

for the most common type that i have seen, once there is no longer a substantial risk of loss (ie, in 2006 she could take possession of the shares and sell them and keep the proceeds even if she left the company), then the value of the shares at that date is taxable as income, whether she actually sells them or not. that amount becomes her cost basis and that is also when her holding period starts for determining long term or short term gains.

one interesting aspect that the employee can choose under certain circumstances, and this is not the common handling at most companies: once the grant is made, you can elect to treat them as taxable income immediately and pay taxes on their value in the current year. this is an election you make with the irs and i believe cannot be changed without their permission once you do so. however, the advantage is then that your holding period starts immediately. and, if in 2006 you expect the shares to be worth a lot more than they are today, it could make good sense because then all that gain will be subject to the long term capital gains rate in 2006 instead of treated as income. whether this makes sense for your situation given your expected income levels this year and in 2006 and the actual share value in 2006, only you can decide.

this is definitely one area where professional tax advice is a must.
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