Companies sometimes give employees shares of company stock as a bonus or other form of compensation. This kind of compensation is known as a stock grant and carries tax consequences that depend on the status of the stock when the employee receives the grant.
Companies often give restricted stock grants, which means that the employee does not receive the stock for a certain amount of time. That period of time is called a vesting period. During the vesting period, the stock is not vested, whereas the stock is vested after that period. Taxes are based on when the stock vests.
Employees must count grants of vested stock as income on that tax year’s return. The employee must report the stock’s market value as income, regardless of whether the employee sells the stock and receives any money or holds the stock and receives no cash. For example, if an employee receives 100 shares worth $20, the employee must report an additional $2,000 in income for that year. The company must withhold taxes on the grant and report the withholding on the employee’s W-2.
The Internal Revenue Service does not charge any tax on restricted stock during the vesting period. However, the employee will have to pay income tax on the grant when it does vest, and the amount will be the shares’ market value when they vest, which is usually a higher amount than when they were granted. For example, if an employee receives 100 restricted shares worth $20 that vest a year later when the share price has jumped to $25, the employee must report an extra $2,500 on his income taxes.
Capital Gains Tax
If an employee opts to hold the grant in a portfolio, any further changes in the share price count as capital gains or losses. If the employee holds the stock for 365 days or longer, any profits from selling the stock are taxed at the 15 percent long-term capital gains rate. The short-term rate is the same as the person’s income tax rate, though the gains do not count as income.