When and how is a grant of restricted stock or RSUs taxed?
The timing of taxation is different than that of stock options. You pay tax at the time the restrictions on the stock lapse. This occurs when you have satisfied the vesting requirements and are certain to receive the stock (i.e. there is no longer any risk of forfeiture).
Key Tax Features
- Your taxable income is the market value of the stock at that time, minus any amount paid for the stock.
- You have compensation income subject to federal and employment tax (Social Security and Medicare) and any state and local tax.
- It is then subject to mandatory supplemental wage withholding. (See related FAQs for details on tax withholding and estimated taxes.)
- The amounts of taxable income and the taxes withheld are included in the corresponding boxes of your Form W-2.
If you have restricted stock units, the taxation is similar, except you cannot make an 83(b) election (discussed below) to be taxed at grant. With RSUs you are taxed when the shares are delivered to you, which is almost always at vesting (some plans offer deferral of share delivery). The amount of taxable income and the withholding calculation are based on the stock's value when your company initiates the share-transfer process (usually the vesting date) and not when the stock appears in your brokerage account. For details, see the section on RSUs.
Example: You receive 4,000 shares of restricted stock that vest at a rate of 25% a year. You do not pay for the grant.
- Stock price at grant: $18
- Stock price at year one: $20 (1,000 x $20 = $20,000 of ordinary income)
- Stock price at year two: $25 ($25,000)
- Stock price at year three: $30 ($30,000)
- Stock price at year four: $33 ($33,000)
|Year from grant date||Stock price at vesting||Ordinary income||Tax timing and withholding|
|One: 1,000 shares vest||$20||$20,000||Vesting date|
|Two: 1,000 shares vest||$25||$25,000||Vesting date|
|Three: 1,000 shares vest||$30||$30,000||Vesting date|
|Four: 1,000 shares vest||$33||$33,000||Vesting date|
Your total taxable income is $108,000. Each vesting increment of this total is taxable, and withholding applies on each vesting date.
- Two years after the last shares vest, you sell all of the stock.
- The stock price at sale is at $50 ($200,000 for the 4,000 shares).
- Your capital gain is $92,000 ($200,000 minus $108,000).
For annotated diagrams showing how to report this sale on your tax return, see Reporting Company Stock Sales in the Tax Center.
Section 83(b) Election Example
Alternatively, you can make a Section 83(b) election with the IRS within 30 days of the grant (this choice is unavailable for restricted stock units). This means you pay taxes on the value of the stock at grant, starting your capital-gains holding period for later resales. If the shares never vest because you leave the company, you cannot recover the taxes you paid at grant. For details of the risks associated with the 83(b) election, see the relevant article.
Example: With the facts of the previous example:
- You make a timely 83(b) election at grant.
- At grant, you have ordinary income of $72,000 (4,000 x $18), and withholding applies.
- When you later sell, you have a capital gain of $128,000 ($200,000 minus $72,000).
Impact of election: By contrast with not making the election in the prior example, the 83(b) election let you convert $36,000 of ordinary income to the lower-taxed capital gain: $128,000 = $92,000 of capital gain in the prior example plus $36,000 that was ordinary income at vesting without the 83(b) election. The $36,000 is the appreciation of the stock price from the grant date to the vest date.
Got another four minutes? Watch our popular video on the taxation of restricted stock and RSUs.