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 vesting, minus any amount paid for the stock.
- With restricted stock (but not RSUs), you can instead make what's called a Section 83(b) election to be taxed on the value at grant instead of at vesting, though even in that case you still cannot sell or otherwise transfer the stock until vesting. The 83(b) election is discussed below.
- The income that you recognize is 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.
- When you sell the shares, you have a capital gain or loss for tax purposes, which can be either short-term or long-term.
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.
Example Of Taxation
You receive 4,000 shares of restricted stock/RSUs 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.
Alert: Even when you sell your shares at vesting with no income gain/loss beyond what is on your W-2, you must still separately report the sale on Form 8949 (see the FAQ about the biggest mistakes to avoid with restricted stock on your tax return).
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 for restricted stock (not RSUs):
- 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.
You can also receive dividends with restricted stock. Dividends are taxable (the tax treatment is discussed in another FAQ).
Got another minute? Watch our 60-second take on the top five things you need to know about the taxation of restricted stock units (RSUs).
