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My sister is an flight attendent for TWA. They were given TWA common stock as a settlement for back pay. She received a letter that this stock, (123 shares in her case), will be taxed and will be taken out on her next paycheck. Is this tax legal? I thought you only got taxed when you sold. What if TWA goes under and she loses everything? A broker won't even sell it if it is under $4.00, which it is.

Your sister received the stock as a settlement for back pay, that means it's treated as salary & wages, subject to income tax and Social Security taxes. Her basis in the stock is the amount they will be adding to her W-2. If TWA goes under, she has a capital loss.
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