Jerni

Last year as part of my partners bonus he was granted some stock options and some restricted stock units. A couple of weeks ago the first block of these became available. We don't have a lot of experience with this.

The RSUs automatically became available in our trading account. Are these now a tax liability? Or does the amount only become taxable if we sell the shares?

A block of the stock options now show as vested and are available to exercise. What happens if we exercise the vested options? It seems there are several options - exercise and sell, hold, net shares or sell-to-cover.

Does capital gains apply to all of these available options? Or only if we sell them for cash? If we exercise and hold on to them for 12 months, is it correct that an 18% long-term capital gains would apply? and if we sell them quicker than that it is taxed at regular income tax rate? Is it the difference between the grant price and current market value that is taxable or the entire amount?

Sorry for all the questions, I've tried to read up on this but we are quite confused (as you can probably tell).

Thanks

Owen778

I was going to post some stuff, but instead, Google is your friend. Read these:
Restricted Stock Awards - Fidelity
Restricted Stock Units - Fidelity
Fidelity Investments – About Stock Options

Probably you have already paid income tax on the RSUs.

Also, you just need to find out if the options are qualified (usually they are not).

Also, google capital gains tax rates. The rate depends on your income, but you may also have to pay Net Investment Income Tax on it at 3.8%, also depending on your income.

theOAP

And google AMT as well to be sure you're under the threshold.

Jerni

Thanks very much. The stock options are non-qualified.

Lots of reading to do tonight! I find this particularly confusing for some reason. I'm sure I'll be back with more questions lol.

Giantaxe

Which actually simplifies things a bit, but at the expense of the "bargain element", regardless of whether you sell or hold, in an exercise being treated as ordinary income that will appear on your W2.

Jerni

Thanks Giantaxe, did not realize it would appear on the W2.

Is it common to take the Special Tax 83(b) election? I realize it's too late now, but going forward these RSU/SO grants are likely to be more common for us. So I was curious if it's something that most people do.

Hawkini

I have had RSU vests last year and sold as well - so had to deal with the tax recently.

For a start, a vesting RSU becomes immediately taxable, as if you had a cash bonus. I've read MOST employers will either withhold taxes at a predetermined rate to cover the taxes, OR use sell-to-cover, so will sell some of your RSUs to cover the taxes, and whatever is left is yours to sell.

If you have sell-to-cover, your company should use a brokerage (gets more complicated if not) and this brokerage will send you a 1099 to show you the event, which you must report - you'll come out with a net loss because of fees.

If you don't sell any, that's it.

If you sell within 12 months, you pay income tax rates on any gain.

If you sell after 12 months, you only long term gains on any gain.

In summary - find out what method the company used to cover the taxes. If it appears on your W-2 you already paid them, if its sell-to-cover you already paid them, but you'll need to report the 1099-B.

If neither, you'll need to pay the taxes yourself, but this in my experience is very rare... and probably even not an option for the employer.

Giantaxe

I think NQSOs also have required withholding.

I don't know anything about RSUs. Iirc, I did do an 83(b) election on an ISO at a prior startup. I have no idea how common a thing that is to do.

Hawkini

83(b) on Restricted Stock in Starts Ups is extremely common (or it should be) - read this as a quick summary: 83(b) Elections For Dummies

EDIT: There is a difference between Restricted Stock and Restricted Stock Units - for my RSUs I have not done 83(b) - I'll stop piping in here and defer to Google since it may start getting complicated and I'm not an expert - I just know what I have done recently and the IRS seems happy so far!

Jerni

Thanks very much Hawkini - I just checked the transaction confirmation statement from when the RSUs vested and it does show they withheld a certain number of shares to cover federal, social security, medicare and state taxes.

So we pay additional income taxes on the gain (in addition to the already withheld taxes) if we sell within 12 months or we pay long-term capital gains if we hold onto the for longer than 12 months? Just want to make sure I understand

Giantaxe - Thanks very much. So we would see withholding on the W2 if we choose to exercise the vested NQSOs? Or would it show up on the W2 for the year they were granted? (I looked at the W2 but don't see a separate entry). Sorry if this is dumb question

Hawkini

Going by what you said it sounds like you had a brokerage do the sell-to-cover - you should expect a 1099-B next year which you'll report very easily on your taxes - no problems there. Nothing else to do - if you sell within 12 months you'll pay your income tax bracket (and any state taxes etc) on the gains (since you already paid taxes on the value when vesting).

If you sell after 12 months you'll pay the lower long term capital gains rate to federal (and state it applicable).

I also have NQSOs - my employer reported the income and taxes on my W-2 ** EDIT ** Because I sold some, the brokerage withheld at a lower tax bracket so my friendly payroll admin told me to withhold extra - glad I did

Since they are options, they are not shares yet and you do not own them, therefore no taxable event until you exercise.

Giantaxe

The year of exercise, be it to sell or hold. You should also get an accounting of taxes/proceeds at the time of the exercise from your employer (or the broker handling option exercises).

Jerni

Thanks Hawkini - that is very helpful Yes, it's all handled through Fidelity. Edited - after seeing Hawkini's edit

Jerni

Thanks Giantaxe - so it's the year of the exercise not the year of the grant when the value is included in the W2. I'm starting to think cash bonuses are much easier lol

Hawkini

I had a very bad year for taxes in 2013 - happily sold some NQSOs and my friendly payroll admin forgot to tell me to withhold extra <sigh>, this time I asked politely if I should and everything was good this year

And yes, NQSOs included in box 1, with associated taxes withheld in the appropriate boxes (+ state).