The amount that is taxed on your restricted stock is the difference between the fair market value of the stock on the date the stock becomes fully vested and the price you are able to exercise it for. This amount could be zero and you should check with your company HR department to determine the amount. The difference must be reported as ordinary income. However, if you do not sell the stock at vesting and sell it at a later time, any difference between the sale price and the fair market value on the date of vesting is reported as a capital gain or loss.
J--the entire value of your restricted stock when it vests is subject to ordinary income tax. Mr. Nobb's answer is incorrect. He must be confusing it with regular stock option vesting.
There is no income reported for restricted stock until the year in which the stock vests. At that time, ordinary income is recognized, and the amount is calculated as follows:
Fair market value of the stock on the vesting date Minus the amount the individual was required to pay for the stock (if any) Equals ordinary income. (FICA and FUTA taxes well)
Later, when the executive sells the stock, a capital gain is recognized. (the fair market value utilized in computing ordinary income tax above becomes your cost basis to compute the future capital gains).
Note there is a distinction between restricted stock and restricted stock units. In the case of units, the value of the stock is included in income on the transfer and vesting date, which are the same date. The income amount is the fair market value of the stock on that date.
Seek a qualified financial advisor and tax professional.
Source GrantThornton, Taxation of stock options and restricted stock: the basics and beyond. By G. Edgar Adkins, Jr.
The above referenced information was obtained from reliable sources, however Lantern Wealth Advisors LLC and Lantern Investments, Inc. cannot guarantee its accuracy. The information presented herein is for presentation purposes only and is not intended to provide personal investment advice. Lantern Wealth Advisors LLC and Lantern Investments, Inc. do not provide tax, accounting or legal advice.
Alan is correct. There is no income reported for restricted stock until the year in which the stock vests. At that time, ordinary income is recognized on the fair market value. Later, when you sell your stock, a capital gain (or loss) is recognized.
Kudo's to my esteemed colleagues... all good answers. In addition, I might add, that you should consult with your CPA regarding taxation and timing of this event. He may be able to suggest losses you might take to offset the gains generated by this event.
Best Regards, Rod Miller, CFP, CLU, ChFC