When you receive equity awards as part of your employment, the eventual proceeds might represent a significant portion of your total net worth. This creates a documentation challenge that many technology workers, executives, and startup employees face when opening corporate accounts, establishing business relationships, or relocating to Cyprus. Banks and regulated entities need to trace where your money originated, and stock-based compensation adds layers of complexity that salary alone does not.
This article addresses the practical reality of proving that the money sitting in your bank account, the capital you intend to invest, or the initial deposit for a Cyprus company actually came from legitimate equity compensation arrangements. The process is not always straightforward, but with proper record-keeping and an understanding of what financial institutions expect, you can satisfy compliance requirements without unnecessary delays.
Why Equity-Based Wealth Raises Questions for Compliance Teams
Financial institutions conducting due diligence must verify both the source of funds (SOF) and source of wealth (SOW) for their clients. SOF relates to the specific transaction at hand. If you transfer €300,000 to open a corporate account, the receiving bank needs documentation showing exactly where those euros came from. SOW takes a broader view, examining how you accumulated your total assets over time.
Equity compensation complicates this picture in several ways:
The value is realised at different points. Unlike a salary that arrives in predictable monthly instalments, stock-based awards may vest over years and convert to cash at various points. A single liquidity event, such as an IPO or company acquisition, might suddenly create substantial wealth that looks unusual without context.
Multiple parties are involved. Your employer grants the awards, a brokerage firm holds the securities, a transfer agent manages the underlying records, and eventually a buyer provides the proceeds. Each party generates different documentation.
Tax treatment varies significantly. Depending on whether you received Incentive Stock Options (ISOs), Non-Qualified Stock Options (NSOs), Restricted Stock Units (RSUs), or other forms of awards, the tax reporting differs. This affects which documents actually reflect your income and when they do.
Timing creates gaps. You might receive an option grant in 2020, exercise it in 2023, and sell the resulting securities in 2025. The compliance team reviewing your application needs to understand that entire timeline, not just the final cash deposit.
For Cyprus-based compliance, AML requirements under EU frameworks require banks, corporate service providers, accountants, and law firms to apply risk-based procedures when evaluating clients. Equity compensation is a recognised legitimate source of wealth, but the burden of proof rests with you.
Understanding the Fundamentals of Stock-Based Awards
Before discussing documentation requirements, it helps to grasp how different equity compensation types actually work. Each generates its own paperwork trail.
Incentive Stock Options (ISOs)
ISOs are available only to employees and offer potential tax advantages. The key characteristic is that no regular income tax applies at exercise, provided you meet specific holding period requirements. You must retain the acquired securities for at least one year after exercise and two years after the grant date to qualify for long-term capital gains treatment.
The process unfolds across several stages:
- Grant date: Your employer provides an option agreement specifying the number of options, the strike price (typically the fair market value on that day), and the vesting schedule.
- Vesting period: Most arrangements use a 4-year vesting schedule with a 1-year cliff. After the cliff, 25% becomes exercisable, with the remainder vesting monthly or quarterly.
- Exercise: You pay the strike price to purchase actual securities. The spread between exercise cost and fair market value may trigger Alternative Minimum Tax (AMT), though not regular income tax.
- Sale: When you eventually sell, capital gains calculations depend on whether you met the holding period requirements.
ISOs have an annual limit of USD 100,000 in value that can vest in any calendar year based on fair market value at grant. Anything exceeding this threshold automatically converts to NSO treatment.
Non-Qualified Stock Options (NSOs)
NSOs offer greater flexibility but different tax treatment. Unlike ISOs, they can be granted to contractors, advisers, board members, and other non-employees. There is no limit on the annual value.
The critical distinction is the timing of taxation. When you exercise NSOs, the spread between your strike price and the current fair market value becomes taxable as ordinary income immediately. This means:
- The income appears on your W-2 (or equivalent local tax document)
- Payroll taxes apply (Social Security, Medicare, or local equivalents)
- Your employer typically withholds tax upon exercise, often by selling a portion of the securities.
From a documentation perspective, NSO exercises create clearer paper trails than ISOs because the taxable event occurs at the exercise rather than at the eventual sale.
Restricted Stock Units (RSUs)
RSUs represent a promise to deliver actual securities at a future date, typically upon vesting. Unlike stock options, RSUs require no purchase price from you.
When RSUs vest:
- The fair market value at vesting becomes ordinary income
- Your employer reports this on your W-2 in Box 1
- Many companies use “sell-to-cover” arrangements, where they automatically sell some vested securities to pay withholding taxes.
- The remaining securitieswill be transferred to your brokerage account
RSUs provide unambiguous documentation because the taxable event and the delivery of the property occur simultaneously. Your W-2 will show the income, and your brokerage statements will show the securities arriving.
Restricted Stock Awards (RSAs)
RSAs involve the actual transfer of securities at grant, though they are subject to vesting restrictions. If you leave before vesting, you forfeit the unvested portion. Unlike RSUs, you can make an 83(b) election to pay tax on the grant-date value rather than the vesting-date value.
Performance-Based Awards
Performance Stock Units (PSUs) and similar arrangements vest only when specific business targets are achieved. The taxation mirrors RSUs, with income recognised at vesting and delivery.
Documentation Generated by Each Transaction Stage
Understanding which documents to keep requires knowing what each party provides at each stage.
At Grant
Your employer should provide:
- Option agreement or grant letter: Specifies the type of award, number of units or options, vesting schedule, exercise price (for options), and other terms
- Summary plan description: Explains how the broader option plan operates
- 409A valuation documentation (for private companies): Establishes the fair market value used for the strike price
Keep the original grant documentation permanently. Banks frequently ask to see grant letters years after the fact when trying to understand how you accumulated your holdings.
At Vesting
For RSUs and RSAs:
- Vesting confirmation: Your brokerage or plan administrator confirms the number of units that vested and the fair market value
- W-2 or payslip: Shows the compensation income and tax withholding
- Brokerage statement: Displays the newly deposited securities
For options, vesting alone does not generate taxable events or most documentation. However, your plan administrator portal typically provides vesting status updates.
At Exercise (Options Only)
When you exercise options:
- Exercise confirmation: Details the number exercised, strike price paid, market price at exercise, and any tax withheld
- Form 3921 (for ISOs): Your employer files this with tax authorities and provides a copy to you
- Form W-2: For NSOs, the compensation income appears in Box 1; Box 12 Code V shows the income amount separately
- Brokerage statement: Shows securities arriving and any proceeds from cashless exercise or sell-to-cover arrangements
- Wire or payment confirmation: If you paid the exercise cost from your bank account, retain the transfer records
At Sale
Selling securities creates the final link in the documentation chain:
- Form 1099-B: Your brokerage reports proceeds, cost basis (sometimes incorrectly), and holding period
- Trade confirmation: Details the transaction specifics
- Brokerage statement: Shows cash proceeds or securities transferred
- Wire confirmation: Documents money arriving in your personal or corporate bank account
Building a Complete Paper Trail for AML Purposes
Compliance officers reviewing your source-of-funds submission need to trace the money from its legitimate origin to its final deposit. For equity compensation, this means connecting several separate pieces.
The Recommended Archive Structure
Organise your records chronologically by grant:
Grant-Level Folder Structure
For each equity award, maintain:
- Original grant agreement
- Any amendments or modifications
- Exercise records (if applicable)
- Vesting confirmations
- Tax documents (W-2s, 1099-Bs, Form 3921)
- Sale confirmations
- Wire transfer records showing proceeds arriving in your account
Annual Tax Documents
Your tax returns and supporting schedules provide third-party verification of reported income. Keep:
- Complete federal and state tax returns
- Form 8949 and Schedule D showing capital gains calculations
- Any AMT calculations (Form 6251), if relevant to ISO exercises
Brokerage Records
- Monthly or quarterly statements covering the period when you held the securities
- Year-end account summaries showing cost basis information
- 1099-Composite forms combining dividend, interest, and capital gain reporting
Addressing Common Documentation Gaps
Several situations create complications:
Missing grant documents: If you cannot locate original grant letters, your employer’s HR or legal department may provide certified copies. Many companies use equity management platforms (such as Carta, Shareworks, or Morgan Stanley at Work) that retain historical records.
Incorrect cost basis on 1099-B: Brokerages frequently report zero or incorrect cost basis for securities received through equity compensation. The “Supplemental Information” document accompanying your 1099-B typically contains the correct adjusted basis. If not, reconstruct it from W-2 records showing the income recognised at vesting or exercise.
Cashless exercises: When you use a “cashless” or “sell-to-cover” arrangement, you never hold cash equal to the exercise cost. The brokerage simultaneously sells enough securities to cover the strike price and taxes. Documentation should include the confirmation showing this netting.
Private company holdings: If the securities have not yet had a liquidity event, you may only have grant documents, 409A valuations, and vesting confirmations. Without a sale, there is no cash to trace, but you should still maintain records for eventual liquidity.
What Banks and Corporate Service Providers Actually Request
Different institutions have different requirements, but typical requests for equity-based wealth include:
| Document Type | Purpose | Required For |
| Employment contract or offer letter | Confirms position and eligibility for equity awards | Initial verification |
| Grant agreement(s) | Shows award details and legitimate corporate origin | All equity types |
| Vesting schedule and confirmation | Demonstrates how ownership was earned | RSUs, RSAs, vested options |
| Exercise confirmation | Proves you converted options to actual securities | ISO and NSO exercises |
| W-2 or equivalent tax form | Third-party verification of reported income | All taxable events |
| Brokerage account statement | Shows securities received and held | Ownership verification |
| 1099-B or sale confirmation | Documents proceed from liquidation | Cash proceeds |
| Wire transfer records | Traces money from brokerage to personal/corporate account | Final cash verification |
| Tax returns with Schedules D and 8949 | Confirms reported gains match documentation | Higher-risk profiles |
For enhanced due diligence situations, which may apply to larger amounts or higher-risk profiles, institutions might additionally request:
- Employer verification letter confirming the equity programme
- 409A valuation reports for private companies
- Cap table extracts showing your ownership percentage
- News articles or press releases about liquidity events
Tax Reporting Creates Your Compliance Backbone
The single most valuable element for SOF verification is your tax reporting history. Tax authorities require employers and brokerages to file information returns, creating independent verification of your claims.
Key Tax Forms and What They Show
W-2 (or local equivalent): Box 1 includes compensation from RSU vesting, NSO exercises, and ESPP discounts. Box 12 Code V separately itemises income from NSO exercises. This proves the employer recognised your equity compensation as legitimate wage income.
Form 3921: Filed by employers when employees exercise ISOs. Shows the grant date, exercise date, exercise price, and fair market value at exercise. This connects your ISO exercises to official corporate records.
Form 3922: Filed when employees acquire securities through Employee Stock Purchase Plans (ESPPs). Documents the purchase price and market value.
Form 1099-B: Brokerages report every sale, including proceeds, acquisition date, cost basis (if known), and whether the gain is short-term or long-term. Even if cost basis reporting is incomplete, the proceeds figure confirms money received.
Form 8949 and Schedule D: Your own tax filing shows how you calculated gains and losses. Maintaining copies demonstrates consistency between your claims and official filings.
The Alignment Test
Compliance reviewers look for consistency. If your grant documents show 10,000 RSUs vesting in 2024, your W-2 should show corresponding compensation income, your brokerage statement should show those securities arriving, and your bank statement should show proceeds if you sold them. Discrepancies trigger additional questions.
One common issue: the fair market value at vesting or sale may differ slightly from the price shown on your various documents due to timing differences. RSU vesting might be calculated at market close while your sell order executes at a different intraday price. Slight variations are normal. Significant discrepancies require explanation.
Management of Ongoing Records Through Career Transitions
People change employers, brokerages close accounts, and companies get acquired. Maintaining equity compensation records across these transitions requires attention.
When You Leave an Employer
Your rights to unvested options typically expire in accordance with the plan terms. For vested but unexercised options:
- ISOs generally must be exercised within 90 days of employment termination, or they convert to NSO treatment
- NSOs may have longer exercise windows, sometimes years, depending on plan terms
- Some companies offer extended exercise periods, especially for long-tenured employees
Document your termination date and any exercise deadlines. If you exercise close to termination, the timing matters for tax treatment and for explaining to compliance reviewers why asignificante transaction occurred around the time you left.
When Your Former Employer Gets Acquired
Acquisitions create accelerated vesting, option cancellation, or conversion to acquirer securities. Retain:
- The merger agreement summary or employee communication explaining the treatment
- Any cash payments for cancelled options
- Conversion ratios and new grant documents if securities were exchanged
These transitions generate additional paperwork but also strengthen your documentation by providing third-party corporate records of the transaction.
When Brokerages Close or Merge
Transfer your complete transaction history before closing accounts. Request official statements covering your entire holding period. Most brokerages can provide historical records for seven years or more.
Presenting Your Equity Story Effectively
When preparing SOF documentation, framing matters. A disorganised pile of documents creates work for reviewers and raises questions. A straightforward narrative, supported by evidence, demonstrates legitimacy.
Suggested Declaration Format
Structure your written explanation to include:
Introduction: State that your funds derive from equity compensation received as part of employment at [Company Name] during [years of employment].
Timeline: Outline when you joined, received grants, when vesting occurred, and when you liquidated holdings.
Amounts: Provide approximate figures for compensation income recognised and net proceeds after tax.
Document References: List attached evidence supporting each claim.
Example:
“I served as Senior Software Engineer at TechCorp Inc. from March 2018 through June 2024. During my tenure, I received the following equity awards:
- March 2018: 40,000 NSOs at USD 2.50 strike price (see attached grant agreement)
- January 2020: 15,000 RSUs with four-year vesting (see attached grant agreement)
- March 2022: Additional 20,000 RSUs (see attached grant agreement)
TechCorp completed an IPO in September 2023. I exercised my vested NSOs and sold a portion of my vested RSUs between September 2023 and February 2024, generating net after-tax proceeds of approximately USD 1.2 million. Supporting documentation includes W-2 forms showing compensation income, brokerage statements showing securities received, 1099-B forms showing sale proceeds, and wire confirmations showing funds transferred to my account at [Bank Name].”
Anticipating Questions
Reviewers commonly ask:
- Why did you receive this much equity? (Answer: Normal technology company practice for senior roles)
- Why were the proceeds so large relative to your salary? (Answer: Company IPO multiplied the value of previously modest grants)
- Where are the proceeds now? (Answer: In my brokerage account at [Institution] and personal bank account at [Bank])
- Did anyone else contribute to these funds? (Answer: No, this represents my individual compensation)
Prepare brief answers for these questions and ensure your documents support them.
Special Considerations for Private Company Holdings
If you hold equity in a company that has not yet experienced a liquidity event, documentation challenges differ. You have no sale proceeds to trace, but you may still need to explain the holding as part of your overall wealth picture.
Relevant documents include:
- Grant agreements showing the award
- 409A valuation reports establishing fair market value
- Cap table statements or shareholder portal screenshots showing your ownership
- Any secondary market transactions, if you sold pre-IPO
For Cyprus compliance purposes, illiquid private company holdings are unlikely to serve as immediate SOF for a transaction since you cannot spend money you have not yet received. However, they do form part of your SOW narrative explaining how your total assets developed.
If you plan to exercise options before a liquidity event, prepare for the exercise cost. Banks may ask how you funded the purchase. If you used salary savings, show the accumulation through bank statements. If you borrowed, document the loan.
Common Pitfalls That Cause Delays
Several mistakes consistently slow down or derail equity-based SOF submissions:
Providing only partial records: Submitting the 1099-B without the grant document, or the sale confirmation without the W-2, forces reviewers to request additional information.
Ignoring cost basis issues: If your 1099-B shows a $0 cost basis but you actually had a basis of $50,000 (because that amount was taxed at vesting), your apparent gain may look inflated. Explain and document the correct basis.
Failing to explain timing: A large cash deposit immediately after termination looks suspicious without context. The explanation “I exercised my vested options within the 90-day window before expiration” with supporting documentation clarifies the situation.
Omitting employer details: Simply stating “stock options” without identifying the employer, the company’s business, or providing any corporate documentation raises questions about legitimacy.
Not accounting for taxes: If you sold $500,000 in securities but only deposited $350,000, where did the rest go? Answer: tax withholding, which should be visible on your W-2 or in the exercise confirmation.
Frequently Asked Questions
Do stock options count as compensation under AML rules when proving where money came from?
Yes, stock-based awards are recognised globally as legitimate compensation. Both Incentive Stock Options and Non-Qualified Stock Options constitute payment for services rendered to an employer. When you exercise vested awards and sell the resulting securities, the proceeds qualify as employment-derived income for source of funds purposes. Banks and corporate service providers require documentation linking the proceeds to the original grant, vesting, exercise, and sale events. Tax filings, particularly your W-2 showing compensation income recognised, provide third-party verification of legitimacy.
What happens if my brokerage reported an incorrect cost basis on Form 1099-B for securities I received through equity compensation?
This is extremely common. Brokerages frequently show $0 or blank cost basis for securities received through RSU vesting or stock option exercises. The correct basis should equal the fair market value at the time you recognised income, which appears on your W-2. Your brokerage’s “Supplemental Information” document often contains the adjusted basis. When submitting documentation to banks, include both the 1099-B and either the supplemental form or your W-2 showing the income that established your basis. Explain the discrepancy in your cover letter to avoid confusion.
How should I document cashless exercises where I never actually held cash for the exercise cost?
Cashless or sell-to-cover exercises involve your brokerage simultaneously selling enough securities to cover the strike price, taxes, and any fees. You never pay from your bank account. Document this by providing the exercise confirmation showing the gross shares exercised, shares sold to cover costs, and net shares retained or cash proceeds. Your W-2 will reflect the compensation income recognised. The brokerage statement will show the net cash or securities after the transaction. Together, these demonstrate that the funds are legitimate, even though money was never left in your personal account.
Can I use unvested equity awards as proof of source of wealth even though I cannot access the value yet?
Unvested awards contribute to your overall wealth picture but cannot serve as an immediate source of funds since you have not received any cash or tradeable securities. For source of wealth declarations, mention unvested holdings to explain your total financial position and career trajectory. Include grant documents showing future vesting schedules. However, if asked specifically about funds for a transaction, you must document the actual funds realised and available. Banks will not accept “I have unvested RSUs worth €200,000” as proof that you can fund a €200,000 deposit.
Getting Professional Support for Equity Documentation
Proving that your accumulated wealth derives from stock-based awards requires careful record-keeping and an understanding of what financial institutions need to see. The documentation burden falls on you, the applicant, but professional guidance can significantly simplify the process.
C.Savva & Associates LTD, based in Nicosia, assists individuals establishing a business presence in Cyprus with their compliance documentation needs. Whether you are opening a corporate bank account, forming a Cyprus company, or navigating residency applications, our team understands the requirements of local institutions. It can help ensure your equity compensation records meet those standards.