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He was given 140 shares. He opted to sell 50 immediately to cover the tax. He ended up with 90 shares. Still, I don't know how to treat this on tax forms.

The value of the shares on the date they were given to him should be ordinary income. I think the company needs to report that on his W2. To that amount, add the $1.40 he paid, and you've got your cost basis.

Since he sold 50 shares immediately, I think we've then got a handle on the FMV of the shares as of the grant date. The sale of those shares would have no gain or loss - they were sold for the same price as their basis (or within $0.50, anyway). The remaining shares will generate a capital gain or loss when they are ultimately sold.

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