Equity Compensation: NSOs, Restricted Stock, RSUs, and SARs Tax Rules

What is an NSO

A nonqualified stock option gives an employee the right to buy employer stock at a set exercise price.

When is ordinary income recognized for an NSO with readily determinable FMV

At the grant date.

How much ordinary income is recognized for an NSO with readily determinable FMV

Option FMV at grant − amount employee paid for the option.

When is ordinary income recognized for an NSO without readily determinable FMV

At exercise.

How much ordinary income is recognized for an NSO without readily determinable FMV

Stock FMV at exercise − exercise price.

What is the basis of stock acquired from an NSO without determinable FMV

FMV of the stock on the exercise date.

When does the holding period start for stock acquired through an NSO

On the exercise date when the employee acquires the stock.

What is restricted stock

Actual employer stock given to an employee but subject to vesting or forfeiture restrictions.

When is ordinary income recognized on restricted stock without an 83(b) election

When the stock vests.

How much ordinary income is recognized on restricted stock without an 83(b) election

FMV at vesting − amount employee paid.

What is the basis of restricted stock without an 83(b) election

FMV on the vesting date.

When does the holding period begin for restricted stock without an 83(b) election

On the vesting date.

What does an 83(b) election do

Elects to recognize compensation income at grant instead of waiting until vesting.

When is ordinary income recognized on restricted stock with an 83(b) election

At the grant date.

How much income is recognized with an 83(b) election

FMV at grant − amount employee paid.

What is the basis of restricted stock with an 83(b) election

FMV on the grant date.

When does the holding period begin with an 83(b) election

On the grant date.

What is the deadline for an 83(b) election

Within 30 days after the property is transferred.

What is the major risk of an 83(b) election

If the stock is later forfeited, tax previously paid on compensation generally is not refunded.

What is an RSU

A promise by the employer to give the employee stock or cash in the future after vesting conditions are met.

Does an employee own actual stock when an RSU is granted

No, an RSU is only a promise of future stock or cash.

When is ordinary income generally recognized for an RSU

When the RSU settles and stock or cash is delivered, usually at vesting.

How much ordinary income is recognized from an RSU

FMV of the stock or cash received.

What is the basis of stock received from an RSU

FMV of the stock when it is included in ordinary income.

When does the holding period start for stock received from an RSU

When the shares are actually received.

Can an 83(b) election generally be made for an RSU

No, because the employee has not yet received actual property.

What is a SAR

A stock appreciation right gives the employee the increase in stock value without requiring the employee to buy the stock.

When is ordinary income recognized from a SAR

Generally when the SAR is exercised.

How much ordinary income is recognized from a SAR

The value of the cash or stock received upon exercise.

What is the basis if a SAR is settled in stock

FMV of the stock included in ordinary income.

When does the holding period start if a SAR is settled in stock

When the employee receives the stock.

Restricted stock versus RSU

Restricted stock gives actual shares now; an RSU is only a promise of shares later.

NSO with determinable FMV shortcut

Tax at grant.

NSO without determinable FMV shortcut

Tax at exercise.

Restricted stock without 83(b) shortcut

Tax at vesting.

Restricted stock with 83(b) shortcut

Tax at grant.

Equity compensation basis shortcut

Basis is generally the FMV when the stock was included in ordinary compensation income.

Equity compensation holding period shortcut

Holding period generally starts when the employee becomes the tax owner of the stock.