Understanding restricted and performance stock

Restricted stock and performance stock typically provide immediate value at the time of vesting and can be an important part of your overall financial picture. Understanding what they are and your options for covering any associated taxes can help you make the most of the benefits they may provide.

Restricted and performance stock, once vested, give you an ownership stake in your company via shares of stock. Once your grant has vested and your company has released the shares to you, you can sell them at your discretion (outside of any company-imposed trading restrictions or blackout periods) or hold the shares as part of your portfolio. When granted restricted or performance stock, you’ll first need to accept the grant. In most cases, restricted and performance stock are granted at no charge to the employee, although some companies may charge a nominal amount per share.

Restricted and performance stock are said to be “vested” when you own the shares free of restrictions—meaning you have the authority to sell, transfer, or make other important decisions concerning the shares. Vesting conditions can be based on employment, the passage of time, and/or contingent upon the achievement of certain performance goals. The rate at which your stock vests—referred to as the “vesting schedule”—is described in your grant agreement and displayed on the Holdings page on etrade.com. You can access the Holdings page by hovering over the Stock Plan dropdown and selecting Holdings.

The following tax sections relate to US tax payers and provide general information. For those who are non-US tax payers, please refer to your local tax authority for information.

Before you take action on your shares, you’ll want to carefully consider the tax consequences. The information contained in this document is for informational purposes only. Tax treatment depends on a number of factors including, but not limited to, the type of award. For advice on your personal financial situation, please consult a tax advisor.

Taxes at vest

The value of your shares when they vest, less the amount you paid for the shares, is treated as ordinary income. Your employer should report this amount on Form W-2 or other applicable tax documents, and it will be subject to income tax. For example, if you have 100 shares that vest when the stock price is $30 per share, and you did not pay for the shares, you’ll recognize ordinary income of $3,000 in the year the shares vest. The ordinary income you recognize upon vesting establishes your cost basis, which is important when you eventually sell, gift, or otherwise dispose of the shares. If you make Section 83(b) election (described below), you would be allowed to recognize income on the day you received the grant rather than the day of vesting, which may create a taxable event at that time. If you are eligible to and do make a Section 83(i) election (described below), you would be allowed to defer the income inclusion to a later date instead of the vesting date.

Taxes at sale

When you sell your shares, any capital gains or losses will be realized. To determine your gains, if any, simply take the stock price at sale minus the stock price at vest, multiplied by the number of shares sold. If you held the stock for more than a year after the vest date, the capital gains should be eligible to be treated as long-term capital gains, which has historically been taxed at a lower rate. Any losses you incur are not taxable, and may even be deductible.

• Acceleration (Section 83(b) election): In some cases, it is possible to move up the first tax trigger from the vest date to the grant date by filing a Section 83(b) election with the Internal Revenue Service (IRS). This must be done within 30 days of the grant. Please keep in mind that paying taxes at grant can be risky, therefore, you should consult with your tax advisor, as there are no allowances for refund or tax loss if your shares fail to vest. You should check with your company to see if it allows this type of election. Section 83(b) elections are not applicable to RSUs or PSUs.
• Deferral: In some cases, it is possible to defer the receipt of shares from a RSU or PSU grant. Even if a deferral election is made, applicable taxes will typically be due at vest. However, income taxes can usually be deferred until the shares are released to you. You should check with your company to see if it allows this type of election and consult with your tax advisor.
  • Section 83(i) election: In some cases, it is possible to defer the first tax trigger from the vest date to a later date by filing a Section 83(i) election with the Internal Revenue Service (IRS). This must be done within 30 days of the vest date. If the election is made, ordinary income is determined on the original vest date, but the income inclusion can be deferred to the earlier of: (1) the first date the underlying stock becomes transferrable, (2) the first date that the employee becomes excluded, (3) the first date that the underlying stock becomes tradable on a stock exchange; (4) five years after the original vest date, or (5) the date that the employee revokes the election. Again, you should check with your company to see if it allows this type of election and consult with your tax advisor.

Taxes at dividends

Any dividends received on your shares are typically considered income and are treated as such in the year they are received. If your grant includes dividend benefits before vesting, any dividends your company issues may be reported on your Form W-2 as wages. If you make a Section 83(b) election (described below), your dividends may be reported on a 1099-DIV, or, if you are not an employee of the company, your dividends may be reported on a 1099-MISC. RSUs and PSUs are typically not eligible to receive dividends.

A closer look at potential tax scenarios¹

Let’s take a look at the potential taxes for different types of restricted stock and performance stock. This hypothetical example assumes a grant of 100 shares or units of company stock issued at no cost to the employee.

¹Tax treatment for each transaction depends on the type of restricted or performance stock you have been granted. Please keep in mind that these examples are hypothetical and for illustrative purposes only. For advice on your personal financial situation, please consult a tax advisor.

²If you have elected to defer the receipt of the shares from your RSUs or PSUs, only employment taxes would be due at vest. Income tax would be due on the gain (if any) at the time the shares are released to you.

Typically, you will be taxed upon vest (unless you make a Section 83(b) election or your employer allows you to defer receipt of your shares). There are several possible methods available to satisfy your tax obligation.

You should check your plan documents to determine which tax payment method(s) are available to you. Types of payments include:

To select your desired tax payment method, log on to etrade.com. From the Stock Plan Overview page, click on Account. Under My Account > Plan Elections, and if you haven’t done so already, click Accept next to the particular grant to be accepted. Make your selection from the Deferral & Tax Payment Elections section available to you for each vesting period.

We’ll alert you when your order has been executed and when settlement occurs.

You can also track your order status on the Orders screen (Stock Plan > My Account > Orders) on etrade.com.

Have questions?

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