Should Nvidia employees with stock options sell or stay put?

An Nvidia employee posted this note on Team Blind, a platform that lets verified employees discuss issues anonymously. To be sure, Nvidia—a chip manufacturer that has been in the news recently after its market capitalization surged to over $2 trillion, thereby becoming the third most valuable US-listed firm behind Microsoft and Apple—does not fly its employees by business class. The celebratory note by the Nvidia employee, mentioned above, refers to the payment he made for a business class flight ticket worth ₹6.45 lakh with RSU grants received from the company. RSUs, or restricted stock units, are shares awarded to employees on completion of certain milestones such as a promotion or completion of a predetermined number of years of employment with the firm.

Nvidia’s massive stock appreciation has created many new millionaires, thanks to the employee stock options, or Esops. One of them is a Bengaluru-based techie whose net worth has grown to ₹1.3 crore in the last six years, courtesy Nvidia’s stock options. The techie, who did not want to be identified, said his current annual CTC (cost-to-company) is ₹25–35 lakh. He holds Nvidia stocks through RSUs and Employee Stock Purchase Plan (ESPP), which allows employees to buy stocks at discounted price. “My stock units have grown about 100X over the years," he said.

Another employee, who holds Nvidia stocks worth ₹9 crore, told Mint that he accumulated the stocks over a decade through ESPPs offered by the company. “When I joined Nvidia, I was offered Esops at $12 a share," the employee, who also did not wish to be named, said. Currently, Nvidia stocks are trading at about $822. This week, the company’s market valuation touched $2 billion. The rally has left many employees wondering whether they should cash in on the opportunity and book their gains or stay put to see the stock value grow further. Meanwhile, some employees want the company to give them higher Esops and lower salaries. But, is that the right strategy?

What should employees do?

Financial experts say this is a good opportunity to liquidate stock holdings and use the capital to repay loans if any. Interest rates on loans have surged significantly in the last 18 months on the back of increased repo rates, so repaying the loans partially or fully will save on total interest outgo.

The employee quoted above with stock units worth ₹9 crore did just that six years ago to repay his two home loans and car loan. “I had sold the units back then for 200% absolute returns, which would have otherwise grown meteorically today. But it doesn’t matter, as liquidating the stocks then helped me pay off all my loans," he said.

Those who don’t need the capital should assess their situation depending on Nvidia stocks in their portfolio.

Sandeep Jethwani, co-founder of Dezerv—a wealth management startup, says employees should approach this issue from a risk management perspective. If a major portion of an investor’s net worth or total financial assets is concentrated in a single stock, it becomes a high-risk situation. “During the dot-com bust which affected several companies, senior employees who held significant equity of their firms saw their net worth dwindling when the stock crashed. Periodical diversification is crucial to avoid a situation where several years of your hard work gets eliminated with one deep market correction," he said.

Jethwani said an effective strategy would be to make a withdrawal framework. “Investors should plan in advance to sell a certain part of their holding whenever the stock rises by a certain percentage. This is what some angel investors also do."

As for the question of more Esops or salaries, employees can decide on this depending on their life stage. Young professionals with fewer liabilities can opt for higher Esops as they may not need a higher disposable income unlike, say, those in their 40s with dependents and need for higher savings to meet their children’s education and other financial goals.

Beware of the taxman

As per Indian income tax laws, foreign assets have to be disclosed in schedule Foreign Assets (FA) of the income tax return (ITR) every year. Stock options, including Esops, RSUs, and ESPP are also foreign assets. This means that if you hold stock options gifted by your employer, you need to report these in your ITR every year. Many taxpayers are not aware of this and report their stock holdings only when they sell the stocks.

Taxation of Esops and RSUs of foreign companies is the same as that for Indian companies—the tax is to be paid when the stock options are exercised and also when they are sold. At the time of exercising the option, the difference between the stock exercise price and the fair market value (FMV) of the shares is treated as a perquisite and is taxed at slab rates. The onus of deducting tax on the perquisite and submitting it with the government is on the Indian subsidiary of the foreign company. However, it is the employees’ responsibility to declare the stocks in the ITR.

Disclosures should be done at all three stages–when the stock options are granted, exercised and sold.

It should be noted that when stock options are vested, the foreign company carries an automated sale to pay TDS, or tax deducted at source. This results in capital gains and hence, the employee has to identify the value of the shares sold in this automated sale and report these under the capital gains head. Employees miss reporting this as the sale is carried out by the employer. Also, in the case of sale, employees only declare the gains under capital gains section, whereas it should also be reported in the FA schedule.

Not disclosing foreign assets will result in scrutiny by the IT department under the Black Money Act and may attract up to ₹10 lakh penalty and even imprisonment in some cases.