When your employer gives you company stock, the grant typically arrives first as restricted stock units, or RSUs. Each unit represents a share of stock you will receive in the future. You’re restricted from selling restricted stock until it is given to you on a specified date.
These stock awards to employees are different than restricted shares that securities laws prohibit the owners from selling. Tax reporting on sales of the RSUs depends on when you sell them.
Restricted Stock Awards and Tax
The date on which the restrictions lapse is called the vesting date. Starting on the vesting date, you can sell the stock without restriction. You’re not automatically taxed when your employer grants RSUs unless you file what's called a Section 83(b) election. Instead, you’re taxed in the year of the vesting date.
Income tax is assessed on the fair market value of the stock on the vesting date minus any amount you paid for grant of the stock. This income is added to your W-2 and taxed with your wages.
Reporting Taxes on Restricted Stock
You report sales of stock after vesting on your tax return as capital gains or losses. The tax calculation requires your cost and holding period.
Your cost is any amount you paid when the RSUs were granted plus the stock value previously added to your taxable wages. Subtract this from sales proceeds to determine gain or loss. The holding period usually begins on the vesting date, but it starts on the grant date if you made a Section 83(b) election.
Receiving income as stock rather than cash complicates paying tax upon vesting. To obtain cash to pay the tax, you can sell some shares of stock and keep the remaining shares. Report the sale of shares at vesting on the tax forms for capital gain or loss; however, no capital gain is possible. The sales proceeds from selling shares totals the same as the amount already taxed as wages.
Exceptions for 83(b) Elections
You can make an election on your tax return and with your company to have tax assessed in the year RSUs are granted, rather than upon vesting. This is called a Section 83(b) election.
By making this choice, the market value of the stock shares at the time they are granted is added to your taxable wages, regardless of the restrictions. No additional tax is due on the vesting date. This can be worthwhile if you have the money to pay the taxes up front, since further increases will be taxed as capital gains rather than ordinary income.
Tax Rates in 2019
Since 2018, ordinary income tax rates have generally decreased across the board while capital gains tax brackets only slightly changed. This may influence your decision on whether or not to take an 83(b) election for new restricted stock units, since the difference in the two tax rates will be smaller.
For tax year 2019, the long-term capital gains tax is 0 percent for taxpayers filing single or married filing separately with taxable income up to $39,375, married filing jointly with income up to $78,750 and heads of household with income up to $52,750.
The tax rate jumps to 15 percent for taxpayers filing single with taxable income from $39,376 to $434,550, married filing separately with income from $39,376 to $244,425, married filing jointly with income from $78,751 to $488,850 and heads of household with income from $52,751 to 461,700.
The highest tax rate is 20 percent, assessed on taxpayers filing single with taxable income greater than $434,550, married filing separately with income greater than $244,425, married filing jointly with income greater than $488,850 and heads of household with income greater than $461,700.