What are the U.S. federal tax effects of restricted stock?

A person who purchases or otherwise receives shares of restricted stock (including unvested stock that is purchased through the early exercise of an option) recognizes ordinary income when the shares vest in an amount equal to the excess, if any, of the fair market value of the shares over the purchase price paid for the shares, if any (the spread), as of the vesting date, unless such person timely files a Section 83(b) election with the IRS. This election treats the restricted stock as vested on the date of transfer for tax purposes.

If the shares are later sold or otherwise transferred, any gain or loss recognized by the recipient upon the sale or transfer of the shares generally will be treated as capital gain or loss, and such gain or loss will be long-term or short-term depending on whether the recipient has held the shares for more than one year after the shares vest.

If a Section 83(b) election is properly filed, the recipient of the restricted stock instead recognizes ordinary income when the shares are received in an amount equal to the spread, if any, at the time the shares are received. If the shares are later sold or otherwise transferred, any gain or loss recognized by the recipient of the restricted stock upon the sale or transfer of the shares generally will be treated as capital gain or loss, and such gain or loss will be long-term or short-term depending on whether the recipient has held the shares for more than one year after the shares were received.

The company will be entitled to a deduction equal to the amount of ordinary income recognized by the recipient of the restricted stock at the end of the recipient’s taxable year in which the recipient recognized such income.

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