Published: Union Leader
January 18, 2025
Q: I will be receiving restricted stock from my employer. Is there a way to minimize my taxes when I sell the stock in the future?
A: Restricted stock is equity ownership that employers may give to employees as a form of compensation. It is considered "restricted" because ownership is contingent upon certain conditions, such as the performance of services. The stock "vests" when the conditions are met.
Ordinarily, your receipt of restricted stock in connection with performing services is subject to Internal Revenue Code ("IRC") section 83(a). Under this section, you must include in your gross income the difference between the excess of the fair market value of the stock when it vests and the amount paid for the stock. Upon vesting, the stock is taxed at the ordinary income rate.
To potentially minimize your taxes on the future sale of restricted stock, you could make an "83(b) Election." Some employers require employees to make 83(b) Elections. IRC section 83(b) permits you to include in your gross income the difference between the fair market value of the stock upon transfer (rather than upon vesting) and the amount you paid for the stock. The stock would be taxed at the ordinary income rate upon transfer to you and then at a potentially lower capital gains rate upon a future sale. If the stock increases in value over time, this could lead to considerable tax savings.
Although this election can minimize tax liability, it is important to consider the risks involved. If the restricted stock loses value or is later forfeited because the required conditions are not met, you cannot claim a loss. In addition, an 83(b) Election is generally irrevocable, absent consent from the Internal Revenue Service.
An 83(b) Election can be made by filing Form 15620. This new form, released by the IRS toward the end of 2024, alleviates the need for tax professionals to develop their own forms based on the sample language provided in Revenue Procedure 2012-29. Form 15620 must be filed by mail no later than 30 days after the date the property was transferred. You must also provide a copy of the form to the employer.
Although an 83(b) Election can potentially help minimize taxes on a future sale of restricted stock, it is important to weigh the risks involved. We recommend consulting a lawyer for assistance assessing the advantages and risks involved in your specific circumstances.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
