Employers provide numerous types of employee compensation plans as a means of ensuring loyalty and longevity. Restricted stocks constitute one such plan. Awarding restricted stocks to employees differs significantly from providing employee stock options. Determining whether the proceeds from restricted stock get taxed requires an examination of IRS regulations regarding restricted stock. Restricted stock taxation occurs all at once or in a staggered fashion, depending upon what you do with your restricted stock.
Employers promise restricted stock to employees as a future bonus. For example, your employer may promise to give you 150 shares of company stock if you stay with the company for five years. When the company makes this promise, it creates a “grant” designating those stocks to you. You receive those shares in full at a pre-determined future date -- in this case, five years from now. Restricted stocks differ significantly from stock options in that employees must actually purchase shares made available through options, while restricted stock shares are handed over as a bonus.
Vesting occurs when restricted stocks pass from an employer to you. The IRS taxes vested stocks as income, because you receive their full value for free, as a form of bonus. These income taxes apply to vested shares whether you sell them or not, meaning this tax relates in no way to the proceeds from the stock. In some instances, you may file Form 83(b) with the IRS, which allows you to pay income taxes on restricted stock at the time of the grant, rather than upon vesting. If you qualify for this provision and a stock increases significantly in value between granting and vesting, you stand to save a significant amount of money on taxes paid.
Restricted Stock Options
The answer to whether proceeds from restricted stocks get taxed is, simply, no. Proceeds on stocks constitute the sale price per share minus the commission for the sale. For example, if you sell a share for $20 and a broker takes a 10 percent, or $2 commission, the proceeds for that share equal $18. Proceeds in no way reflect how much you actually make from a stock, and because of this the government levies no taxes against them. Rather, you pay taxes on capital gains, or the profit made from a share.
Capital Gains on Restricted Stock
Calculate the capital gains earned on restricted stock by subtracting the value of the share at vesting from the value at the point of sale. For example, if a share holds a $15 value at vesting and you sell the share for $20, your capital gain equals $5 per share. If you hold stocks for more than one year and sell them, the federal government levies a long-term capital gains tax at a lower rate than standard income tax. Short-term capital gains, or those earned on stocks held for less than one year, constitute regular income. If you sell shares immediately upon vesting, you pay taxes on the share value as income and on the short-term capital gains earned. You can deduct capital losses if you sell a stock for a lower price than its value at vesting.
When your company grants you restricted stock, you technically own those shares, though you cannot access them until they vest. During the course of restricted stock ownership, you may accrue dividend payments before the stock vests. You must claim dividends as a form of income on your income tax return and pay all applicable taxes on this money. Whether you receive dividends on restricted stock depends upon the nature of the stocks and the deal your employer strikes with you.
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