When and how is a grant of restricted stock or RSUs taxed?

The timing of taxation is different than that of stock options. You pay tax at the time the restrictions on the stock lapse. This occurs when you have satisfied the vesting requirements and are certain to receive the stock (i.e. there is no longer any risk of forfeiture ).

Your taxable income is the market value of the stock at that time, minus any amount paid for the stock. You have compensation income subject to federal and employment tax (Social Security and Medicare) and any state and local tax. It is then subject to mandatory supplemental wage withholding. (See a related FAQ for details on tax withholding and the ways of paying it.)

If you have restricted stock units, the taxation is similar, except you cannot make an 83(b) election (discussed below) to be taxed at grant. With RSUs you are taxed when the shares are delivered to you, which is almost always at vesting (some plans offer deferral of share delivery). For details, see the section on RSUs. Example: You receive 4,000 shares of restricted stock that vest at a rate of 25% a year, and the market price at grant is $18. You do not pay for the grant. The stock price at year one is $20 (1,000 x $20 = $20,000 of ordinary income), at year two $25 ($25,000), at year three $30 ($30,000), and at year four $33 ($33,000); the total is $108,000, each increment of which is taxable on its vesting date. You sell all the stock two years after the last shares vest, when the price is at $50 ($200,000 for the 4,000 shares). Your capital gain is $92,000 ($200,000 minus $108,000). For annotated diagrams showing how to report this sale on your tax return, see Reporting Company Stock Sales in the Tax Center.

Alternatively, you can make a Section 83(b) election with the IRS within 30 days of the grant (this choice is unavailable for restricted stock units). This means you pay taxes on the value of the stock at grant, starting your capital-gains holding period for later resales. If the shares never vest because you leave the company, you cannot recover the taxes you paid at grant. For details of the risks associated with the 83(b) election, see the relevant article. Example: With the facts of the previous example, you make a timely 83(b) election at grant. At that point you have ordinary income of $72,000 (4,000 x $18) and, when you later sell, a capital gain of $128,000 ($200,000 minus $72,000). In contrast with the method of the prior example, the election allowed you to convert $36,000 of ordinary income to the lower-taxed capital gains ($128,000 = $92,000 of capital gain in the prior example plus $36,000 that was ordinary income without the 83(b) election).

You can also receive dividends with restricted stock. Dividends are taxable (the tax treatment is discussed in another FAQ ).