restricted stock

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linuxuser
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restricted stock

Post by linuxuser » Wed Mar 14, 2012 8:28 am

In my job offer, I was given restricted stock which apparently vest over time.

Can someone explain to me the tax consequences should I sell them when they vest?

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cheese_breath
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Re: restricted stock

Post by cheese_breath » Wed Mar 14, 2012 9:18 am

I'm no tax expert, but I have related questions. If the stock was really "given" (zero dollars cost) is it considered his now, or does it become his when it vests? If it becomes his now then my guess would be the basis is zero, and everything at time of sale would be capital gain. If it doesn't become his until it vests then my guess would be the basis at time of vesting would be treated as regular income. But as I said I'm no tax expert. Just asking some questions for you guys who are.
The surest way to know the future is when it becomes the past.

Valuethinker
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Re: restricted stock

Post by Valuethinker » Wed Mar 14, 2012 9:27 am

linuxuser wrote:In my job offer, I was given restricted stock which apparently vest over time.

Can someone explain to me the tax consequences should I sell them when they vest?
I can't comment re US tax.

I can say something about the SEC. You need 'registration rights' on the stock to sell it. Ie the stock has to be registerd with the SEC (the term applied is also 'piggyback rights' ie if someone else's class of stock is registered, so is yours) before it can be sold (for a listed company).

That's something you need to inquire about as there are often all kinds of restrictions about when employees can sell. In a worst case, your stock could vest (creating an income tax liability) but you are not given cash to pay the tax liability (don't know if that could happen in the US it certainly can in the UK).

ThinkingRunner
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Re: restricted stock

Post by ThinkingRunner » Wed Mar 14, 2012 9:29 am

TFB has a comprehensive overview of RSU tax treatment. Your basis equals the stock price on the vesting date and this amount is taxable to you at ordinary income rates. If you sell immediately upon vesting, RSUs can be thought of as a cash bonus. If you hold on, you will be in capital gain/loss (ST or LT as the case may be) territory when you sell w.r.t. the basis on the day the RSUs vest (this is in addition to the income tax paid on the vesting date price).

http://thefinancebuff.com/restricted-st ... u-tax.html

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interplanetjanet
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Re: restricted stock

Post by interplanetjanet » Wed Mar 14, 2012 9:36 am

ThinkingRunner wrote:TFB has a comprehensive overview of RSU tax treatment. Your basis equals the stock price on the vesting date and this amount is taxable to you at ordinary income rates. If you sell immediately upon vesting, RSUs can be thought of as a cash bonus. If you hold on, you will be in capital gain/loss (ST or LT as the case may be) territory when you sell w.r.t. the basis on the day the RSUs vest (this is in addition to the income tax paid on the vesting date price).

http://thefinancebuff.com/restricted-st ... u-tax.html
The consequence of this is that holding RSU shares once they vest is identical to getting a cash bonus and then choosing to buy RSU shares with it. Unless your asset allocation closely matches an increasing degree of employer stock ownership on the same schedule, holding shares when they vest is suboptimal. I recommend selling them at vesting time and then putting the proceeds into your normal asset allocation.

-janet

bigred77
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Re: restricted stock

Post by bigred77 » Wed Mar 14, 2012 9:40 am

I'm sure someone else with a better understanding of the tax code will chime in but I believe there are different kinds of RSUs (restrictive stock units). I think there are also different tax strategeies that can be implemented. It can be kind of complex. (EDIT*** sorry, better explained in the posts above. Also, I'm lumping RSUs with non-qualified stock options, incentive stock, share appreciation rights, etc. It sounds like RSUs are pretty much the same everywhere and fairly simple.)

I can tell you from my experience (and this is only applicable if you are receiving the same type of RSUs as I do. I'm pretty sure my RSUs are the most common type), the day they vest you will either receive shares or cash depending on whether you elected to exercise and sell or take shares in kind. The value is based on the share price the day they vest. My plan, and I think this is common, withholds tax from either election and the value is considered earned income. (i.e. I pay federal income tax, SS tax, and medicare tax). If i take shares in kind I will only get 68 shares for every 100 that vest (32 shares are withheld for taxes).

If you take the cash, thats it, your done. Its basically like getting a cash bonus equal to the number of shares that vested times the stock price. They obviously withhold taxes like they normally would.

If you take the shares your basis is going to be the stock price on the day it vests. If you hold for one year from the vesting date any gains will be capital gains. If you sell in less than a year you will have either a short term gain or loss.

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BruceM
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Re: restricted stock

Post by BruceM » Wed Mar 14, 2012 11:43 am

linuxuser wrote:In my job offer, I was given restricted stock which apparently vest over time.

Can someone explain to me the tax consequences should I sell them when they vest?
Are these restricted stock or restricted stock units?

With the former, you are actually granted the stock, but are restricted from controlling the shares until they vest to you. With this arrangement, you have the option within 30 days of being granted the stock, to exercise the '83(b)' option and take the fair market value of the granted stock as compensation income, then when the shares vest to you this is not a taxable event, but upon sale of the stock, treating any gain over what you paid income tax on (the basis) as capital gains. The risk with this election is if you never vest the stock, you cannot use what you paid as a base for a loss...you simply would lose it. The reason for this is because you never owned the stock.

If the latter, you don't have the 83(b) option as you don't hold the stock...only the rights to the stock once it vests to you (as previously explained).

http://www.fairmark.com/execcomp/sec83b.htm

BruceM

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linuxuser
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Re: restricted stock

Post by linuxuser » Wed Mar 14, 2012 11:48 am

Thanks everyone.

I re-read the letter, and these are Restricted Stock Units.

The irony is that I was given more of these RSUs, because I wouldn't be immediately eligible for the employee stock purchase plan.
Little did they know that being a Boglehead, I am not exactly keen on using my own $ to buy company stock.

bowest
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Re: restricted stock

Post by bowest » Wed Mar 14, 2012 12:40 pm

Another silly question since I'm dealing with RSUs the first time this year... will the employer typically report this on the W2 or do I have to make the calculation?

bigred77
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Re: restricted stock

Post by bigred77 » Wed Mar 14, 2012 12:59 pm

linuxuser wrote:Thanks everyone.

I re-read the letter, and these are Restricted Stock Units.

The irony is that I was given more of these RSUs, because I wouldn't be immediately eligible for the employee stock purchase plan.
Little did they know that being a Boglehead, I am not exactly keen on using my own $ to buy company stock.
A little side note on this as well. If your ESPP gives you a discount on the share price (I know iv'e seen some that give a 15% discount, sometimes you'll pay the lower of the stock price the day you elect to purchase and the day the stock "vests" or your able to sell it) it may be in your best interest to buy as much as you can and then immedietly sell as soon as your able to. It may give you an opportunity for a free 15% return on whatever amount the maximum you can contribute to it is. This would of course depend on your specific plan details and assuming this wouldn't cause you any cashflow problems.

bowest wrote:Another silly question since I'm dealing with RSUs the first time this year... will the employer typically report this on the W2 or do I have to make the calculation?
Yes I believe it is reported as regular earned income on your W2

Wagnerjb
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Re: restricted stock

Post by Wagnerjb » Wed Mar 14, 2012 1:01 pm

interplanetjanet wrote:
ThinkingRunner wrote:TFB has a comprehensive overview of RSU tax treatment. Your basis equals the stock price on the vesting date and this amount is taxable to you at ordinary income rates. If you sell immediately upon vesting, RSUs can be thought of as a cash bonus. If you hold on, you will be in capital gain/loss (ST or LT as the case may be) territory when you sell w.r.t. the basis on the day the RSUs vest (this is in addition to the income tax paid on the vesting date price).

http://thefinancebuff.com/restricted-st ... u-tax.html
The consequence of this is that holding RSU shares once they vest is identical to getting a cash bonus and then choosing to buy RSU shares with it. Unless your asset allocation closely matches an increasing degree of employer stock ownership on the same schedule, holding shares when they vest is suboptimal. I recommend selling them at vesting time and then putting the proceeds into your normal asset allocation.

-janet
I agree with Janet's comments. Sell immediately and diversify.
Andy

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interplanetjanet
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Re: restricted stock

Post by interplanetjanet » Wed Mar 14, 2012 1:33 pm

linuxuser wrote:The irony is that I was given more of these RSUs, because I wouldn't be immediately eligible for the employee stock purchase plan.
Little did they know that being a Boglehead, I am not exactly keen on using my own $ to buy company stock.
A good ESPP can be one of the best things there is to put money in. If you can sell immediately without negative consequence and you get a reasonable discount (15% is common), I would highly recommend considering putting the maximum you can towards it - even to the point of temporarily stopping 401k contributions! You only need to come up with the extra money for the first six months (or however long your ESPP cycle is - it can vary) and after that just sell after every purchase.

http://thefinancebuff.com/employee-stoc ... pp-is.html

-janet

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linuxuser
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Re: restricted stock

Post by linuxuser » Wed Mar 14, 2012 2:22 pm

I had better read the literature I will receive when I show up for work on the first day.
:moneybag

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