Restricted shares vs stock options

Restricted shares are a form of compensation that vest or become available to sell over time. Stock options allow employees to buy stock at a.
Table of contents

• Vesting RSUs and RSAs
• Stock Options vs. RSUs - What's the Difference? - TheStreet
• Restricted Shares vs. Stock Options: What's the Difference?
• Differences Between Stock Options and RSU

However, it is possible that your company can settle the value of the units with cash. That means, in lieu of stock shares, you actually receive cash. You should check your plan document to see what might happen in your specific situation and what options you have. Prior to receiving the value whether paid as stock or as cash , you will need to settle-up on the tax due. This is because your restricted stock units are often taxed when they vest. The amount that is taxable to you as compensation income, which is potentially subject to Social Security and Medicare tax , is equal to:.

The amount you will report as taxable income would be:. Again, you may actually owe more tax than our above example because of Social Security, Medicare, and state taxes, if applicable the above example only illustrates income tax rates. This is where working with a tax professional can be extremely helpful. With so many variables involved, it could be tough to estimate your tax bill on your own. To cover this income tax need, you could consider some of the following options when your restricted stock units vest:. You may still owe additional tax at the end of the year, pending your specific tax returns.

Know your tax situation so you can plan for the tax due if any.

Vesting RSUs and RSAs

In fact, knowing a tax may be due may be a reason to make an estimated tax payment in the quarter the restricted stocks units vest. Again, it may make sense to work with a CPA or an advisor who can hel p you work through the numbers. Each tax situation is different, and hypothetical examples like the above are only used to illustrate a point, not make a recommendation. When the dust settles from vesting, paying tax, and obtaining your share ownership, you need to decide whether to keep the shares or sell them.

If you keep your shares, you will be subject to the risk-reward trade-off of owning a single stock position. A single stock position is often considered more volatile than a portfolio of stocks, meaning you may be more likely to see a greater level of volatility. If you choose to keep the shares, you may want to consider how much of your net worth is already allocated to this single stock position. If you find yourself with a greater percentage than mentioned, it may warrant a longer conversation about your financial planning goals, objectives, and risk tolerance.

If you decide to sell your shares, you will be subject to tax rules for selling an investment — which means you need to be aware of short-term and long-term holding periods and how each could affect you. A holding period is a time between when the shares were purchased and when the shares were sold.

A short-term capital gain or loss is anything that is sold prior to being held for 1 year, and a long-term capital gain or loss applies to anything that has been held for one year or more. Your holding period for the restricted stock shares typically begins on the date the shares vested, and the holding period helps determine what tax may be due.

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• Stock Options vs. RSU.

Short term gains are typically taxed at ordinary income tax rates. Long term gains are subject to preferential long-term rates. The gain or loss is the difference between the cost basis of the stock purchase price and the sale price of the stock. Restricted stock units RSUs are similar to a restricted stock award in a number of ways but there are a few key differences. In either type of equity plan, vesting may be time or performance-based and cash or shares could be delivered upon vesting.

Assuming a restricted stock award recipient does not make an 83 b election, the tax treatment for RSUs and RSAs will be the same for employees of publicly traded companies.

An 83 b tax election is not permitted for holders of restricted stock units. Employees with either type of equity compensation run the risk of forfeiting the award if they leave prior to meeting the vesting requirements. Some other differences include receipt of dividends and voting rights for restricted stock award. Restricted stock awards are grants of stock or purchase right that are subject to limitations until the shares vest. This prevents you from owning or selling shares until conditions are met in the future.

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3. How do Restricted Stock Award Plans work?.
4. The Great Benefits Of Restricted Stock And Restricted Stock Units (RSUs).

This is actually a benefit, assuming you expect the stock price will increase significantly. Both types of stock options are similar to restricted stock, but there are key differences:. The taxation of restricted stock awards is one of the more unique features of this type of equity compensation. Individuals have some say in how their RSA is taxed through the choice to either make an 83 b tax election or take no action and proceed with the default tax method.

The default taxation of restricted stock awards is as follows: no tax is due when the grant is accepted, but at vesting, the difference between the fair market value of the stock and the amount you paid for the shares if any is considered ordinary income. If you receive cash instead of shares or opt to sell the shares immediately upon vesting, there will be no additional tax consequences.

For individuals who hold the shares for at least a year after they vest, the subsequent gain if any will be taxed as a long-term capital gain when the shares are later sold. The capital gains tax rate will depend on your holding period. Long-term gains are taxed more favorably than short-term, where the tax rates are the same as ordinary income.



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An 83 b tax election enables restricted stock award recipients to pay ordinary income tax on the award before it vests — the amount to be included as ordinary income is the difference between the fair market value of the stock at grant and the amount if any the employee paid for the shares. Any subsequent gain or loss after the shares vest would be considered a long-term capital gain or loss and tax would only become due in the year the shares were sold. Within 30 days of accepting the grant, Ben makes an irrevocable 83 b election with the IRS and notifies his employer.

As one might expect, there are a number of pros and cons for investors to weigh when considering making an 83 b tax election. Equity plans can offer employees additional income or even a cash windfall , but there are important financial and tax considerations at play. Holding a concentrated stock position could mean paper-profits are never realized and the lack of a properly diversified portfolio can increase the risk of loss.

A well-designed strategy takes your entire financial situation into account, including your risk tolerance, future employment plans, cash needs, and how best to allocate potential proceeds between multiple goals. Consider working with a financial advisor at Darrow Wealth Management to help you develop a plan to maximize the benefits of your restricted stock within the context of your whole financial life. Note: this article is intended to provide an overview of restricted stock awards and the various tax considerations at play.

This means employees only owe taxes when they sell the stock received after the options are exercised.

Differences Between Stock Options and RSU

Receiving or exercising statutory options does not create a taxable event, only the subsequent stock sale triggers a liability. If an employee owned the options for at least two years or held the shares for at least 12 months following the option exercise, the profit is subject to favorable long-term capital gains treatment. Shorter holding periods will result in ordinary income, taxed at the normal marginal rate. Stock options are risky — if the underlying stock never pierces the strike price, the options remain worthless.

Restricted shares have, when vested, the same value as normal shares trading on the stock market. Restricted stock is sometimes also called letter stock. Restricted shares cost employees nothing, and receiving them is not a taxable event. Employees are taxed as the shares vest. When a share is vested, the employee must note the share value on the vesting date and pay taxes on that amount as ordinary income. When the stock is sold, the employee pays either long- or short-term capital gains tax on any further appreciation as normal.

Within 30 days of receiving restricted shares, an employee can elect what's called Section 83b tax treatment.