Convertible securities definition

A convertible security is a share or bond which may be converted into another type of share or bond. The right to convert may be unconditional, or may depend on a stated set of future circumstances. Sometimes the right to convert may be acquired later. The significance in terms of tax is chiefly to do with securities acquired through employment (employment-related securities). Without specific legislation it would be possible to reward an employee with shares of a certain value (and subject to tax on that value) which could later be converted to securities of a higher value. Not surprisingly, there are detailed rules designed to bring into the tax net any such subsequent increase in value. There is a specific tax definition of the term "convertible securities" which may be considered to be wider in scope than a straightforward commercial definition, and as such needs to be considered very carefully by employers wishing to reward employees in this way.