editione2.1.1
Updated September 12, 2022This table is a summary of the differences in taxation on types of equity compensation.
| Restricted stock awards | ISOs | NSOs | RSUs | |
|---|---|---|---|---|
| Tax at grant | If 83(b) election filed, ordinary tax on FMV. None otherwise. | No tax if granted at FMV. | No tax if granted at FMV. | No tax. |
| Tax at vesting | None if 83(b) election filed. Ordinary tax on FMV of vested portion otherwise. | No tax if granted at FMV. | No tax if granted at FMV. | Ordinary tax on current share value. |
| Tax at exercise | AMT tax event on the bargain element. No ordinary or capital gains or employment tax. | Ordinary tax on the bargain element. Income and employment tax. | ||
| Tax at sale | Long-term capital gains tax on gain if held for 1 year past when taken into income. Ordinary tax otherwise (including immediate sale). | Long-term capital gains if held for 1 year past exercise and 2 years past grant date. Ordinary tax otherwise (including immediate sale). | Long-term capital gains if held for 1 year past exercise. Ordinary tax otherwise (including immediate sale). | Long-term capital gains tax on gain if held for 1 year past vesting. Ordinary tax otherwise (including immediate sale). |
Because they are so important, we list some costly errors to watch out for when it comes to taxes on equity compensation:
βdangerβ If you are going to file an 83(b) election, it must be within 30 days of stock grant or option exercise. Often, law firms will take a while to send you papers, so you might only have a week or two. If you miss this window, it could potentially have giant tax consequences, and is essentially an irrevocable mistakeβitβs one deadline the IRS wonβt extend. When you file, get documentation from the post office as well as a delivery confirmation, and include a self-addressed, stamped envelope for the IRS to send you a return receipt. (Some people are so concerned about this they even ask a friend to go with them to the post office as a witness!)
βdangerβ Watch out for the AMT trap weβve already discussed.