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With a restricted stock award, the time period for determining your eligibility for long-term capital gains tax treatment starts on the day that the restrictions lapse. Restricted stock awards let you take advantage of a so-called "83 b election," which allows you to report the stock award as ordinary income in the year it's granted and then start the capital gain holding period at that time caution: Restricted stock units, unlike restricted stock awards, aren't eligible for an 83 b election because no stock is actually issued to you when the units are granted and you can't pay tax on a thing you don't own yet.
What you're getting is essentially a promise that on a date in the future, you'll be issued the stock if you've met all the vesting requirements. On that date, you will pay ordinary income tax on the value of the stock. After you've been issued the stock and you sell your shares, you'll either incur a capital gain or a capital loss cost basis equal to the value of the shares at vesting , which will be treated like any other stock sale. With stock options, taxes come into play at the time you exercise your options.
Incentive stock options ISOs receive special tax treatment as long as you meet certain conditions. The spread—the difference between the strike price and the market price on the date of exercise—is exempt from ordinary income tax. When you sell the shares, any gain is subject to the favorable long-term capital gains tax rate. You sell your ISO shares without meeting the holding period requirements—what's called a disqualifying disposition—and if the sale occurs in the same year as exercise THEN: The spread and any gain from the sale of the shares are taxed as ordinary income.
Nonqualified stock options NQSOs are taxed differently. The spread—the difference between the strike price and the market price on the date of exercise—is taxed as ordinary income in the year of exercise and is subject to income and payroll tax withholding. You hold the shares more than one year after you exercise and sell the shares for a gain THEN: The subsequent gain is taxed at the long-term capital gains rate cost basis equal to the share price value at the time of exercise.
You hold the shares one year or less after exercise and sell for a gain THEN: The gain is taxed at your ordinary income tax rate. As with most things tax-related, you should consult with a tax advisor who's familiar with your state's rules and your particular financial circumstances. The right strategy for you will depend on many things, including how your company has structured your stock award and what type of award you've been granted.
That said, here are some of the more common strategies for reducing compensation-related taxes: Consider maxing out your k. Determine if an 83 b election is an option for you. If you're granted a restricted stock award, you have two choices: You're granted 10, shares of restricted stock on January 1, If you take the 83 b election, you lock in the income tax and long-term capital gains tax rate that's in effect when you make the election.
If you don't take the 83 b election, you'll owe ordinary income tax on the whole amount 0. So why not take an 83 b election? First, you could lose your job before the stock vests. In that case, you'd never own the stock outright, and you can't reclaim the taxes you already paid on it. Second, the stock price could fall between the grant date and the vesting date, which means the ordinary income tax you paid on the grant date would be higher than the ordinary income tax you would have paid on the vesting date if you'd waited.
An 83 b election might make sense in a pre-IPO scenario when the share price is extremely low, but could be a big gamble for post-IPO shares with a higher price tag. The 83 b election is irrevocable with no relief for taxes paid, so be sure to consult your tax and investment advisors before making a decision either way. Consider donating to charity. There are a couple alternatives here: Donating appreciated stock directly.
You can gift appreciated long-term positions to qualified charities for a full, fair-market-value tax deduction subject to adjusted gross income limitations and no capital gains tax. Donating stock to a donor-advised fund. When you contribute to a donor-advised fund you open and fund your account with an irrevocable, tax-deductible contribution—but you don't have to decide right away how you want to give. Your account has the potential to grow tax-free, and when you're ready, you can recommend grants to the charities of your choice.
Donating stock to a charitable remainder trust CRT. A CRT can give you an immediate tax deduction for the value of your gift or generate annual income for a set number of years. At the end of that time, the remaining assets to go charity. The gain on any stock sales, along with any potential ongoing current income or appreciation on the trust portfolio, is taxed only when funds are withdrawn from the trust, typically on an annual basis over a period of years.
Spiegelman specializes in personal financial planning, including income tax, estate tax, retirement, cash flow, net worth, compensatory stock options, employee plans, investments and portfolio planning. Call toll-free with an international dialing instructions. Call toll-free using our international dialing instructions.
How do I open a brokerage account? How do I exercise my options? How do I accept my equity awards? The information on this website and that provided by the Equity Award Consultation Team are not intended to be a substitute for specific individualized tax, legal, or investment planning advice.
Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner, legal advisor, or investment manager. Schwab, a registered broker-dealer, offers brokerage and custody services to its customers. Your Stock Award Different tax rules apply to different types of stock awards. Find out what rules apply to you and learn about some strategies that can help to reduce your tax burden.
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