As an employee, your gross income includes employer stock that is transferred to you (or your beneficiary) in exchange for your performing services for the employer. The amount included in your income is the excess of:
(1) the fair market value of the employer stock at the first time your rights to the stock are substantially vested over
(2) the amount (if any) you pay for the property.
This amount is generally included in your income as ordinary compensation income for the first tax year in which your rights to the stock are substantially vested – that is, the year in which the stock is either transferable by you or is not subject to a substantial risk of forfeiture. Stock is generally subject to a substantial risk of forfeiture if your rights in the stock depend on your performing substantial future services for the employer. Thus, if your rights in the stock are not substantially vested when you receive it (i.e., you cannot transfer the stock, and your rights in the stock depend on your performing future services for your employer), the tax on the value of the stock over the amount paid for the stock is delayed until the year the stock becomes transferable by you, or your rights in the stock no longer depend on your performing future services for your employer, whichever occurs first.
Instead of waiting for the year your rights in the stock become substantially vested, you can elect to include in gross income, for the tax year in which the stock is transferred to you, the excess of the fair market value of the property at the time of transfer over any amount you pay for the property. This is referred to as a Section 83(b) election and you can make this election even if you paid full value for the stock at the time of the transfer, and thus realized no bargain element in the transaction. The practical effect of making this election is that it closes the compensation element of the transaction in the year you receive the stock; any subsequent appreciation realized on the stock will be taxed as capital gain rather than ordinary compensation income when you later sell or exchange the stock. Further, any dividends paid on the stock will be taxed at the favorable tax rates that apply to dividends rather than the less favorable rates that apply to compensation.
You have a very limited time to make this election; the election must be made within 30 days after the date of the stock transfer. It can also be made before the date of the transfer. The election may be revoked only with IRS consent, and under only very limited circumstances. A decline in the value of the stock is not one of those circumstances.
Please contact the office of Don Fitch Accountancy at (760)567-3110 or Email Don.Fitch@CPA.com if you have any questions or would like additional information.
DON FITCH, CPA
74478 Highway 111 #3
Palm Desert, CA 92260
Toll Free: (877)CPA-Help or (877)272-4357
P.S. My firm is based upon referrals. Please feel free to refer my firm to anyone you know that is looking for a new CPA and/or tax preparer. Thank you in advance.
(Updated 05112021-1 320-315)