Legal Definitions - tip

The term "tip" has two distinct meanings in a legal context:

• 1. Confidential Information (Securities Law)

  In securities law, a "tip" refers to advance or inside information about a company or its securities that is not yet publicly known. This information is typically passed from someone with access to it (an "insider") to another person (a "tippee"). If the tippee then uses this non-public, material information to buy or sell securities for personal profit or to avoid losses, it can constitute illegal insider trading, which is a serious offense.

  • Example 1: Corporate Merger

    A senior executive at Company A learns that their company is about to announce a major acquisition of Company B. Before the public announcement, the executive casually mentions this to a close friend. The friend, knowing this information would likely cause Company B's stock price to rise, immediately buys a large number of shares in Company B.

    Explanation: The executive provided a "tip" to their friend—confidential, market-moving information about the impending merger. The friend then used this non-public information to trade securities, which could be considered illegal insider trading.

  • Example 2: Pharmaceutical Drug Trial Results

    A researcher at a pharmaceutical company discovers that a new drug they are developing has failed its critical clinical trials, a fact that will significantly impact the company's future earnings. Before this negative news is released to the public, the researcher tells their sibling about the trial results. The sibling then sells all their stock in the pharmaceutical company.

    Explanation: The researcher gave a "tip" (negative, non-public information) to their sibling. By acting on this tip to sell shares before the public announcement, the sibling avoided potential losses, which could also be a form of illegal insider trading.

• 2. Gratuity for Service (Tax Law)

  In a different legal context, particularly regarding tax law, a "tip" refers to a gratuity or an extra payment voluntarily given by a customer to a service provider in appreciation for their service. This additional payment is considered income and is subject to taxation.

  • Example 1: Restaurant Service

    After enjoying a meal at a restaurant, a customer pays their bill and leaves an additional 20% of the total cost for their server, beyond the price of the food and drinks.

    Explanation: The extra 20% is a "tip," a voluntary payment given to the server for their service. This amount is considered taxable income for the server.

  • Example 2: Hair Salon Visit

    A client visits a hair salon for a haircut and styling. After the service, they pay the standard fee for the haircut and also give an additional $15 directly to their stylist.

    Explanation: The additional $15 is a "tip" provided to the stylist as a gesture of appreciation for their work. This gratuity must be reported by the stylist as income for tax purposes.

  • Example 3: Hotel Bellhop

    Upon checking into a hotel, a guest has a bellhop assist them with carrying their luggage to their room. After the bellhop places the bags in the room, the guest hands them a few dollars.

    Explanation: The money given to the bellhop is a "tip" for the service of carrying the luggage. This payment is part of the bellhop's taxable income.