My company gave me a few (very few!) Restricted Stock Units. You have to log in and “accept” the grant before it becomes legit. Why is this necessary? In what situation(s) would someone want to reject a stock grant?
You need to find out if the company is accepting the tax burden or passing it on to you. Given that these are restricted stocks, you may not be able to sell them for some time, if ever. If you are liable for the tax, you will be taxed on their current market value even though you won’t be able to sell them. That may be reason to reject them depending on your financial situation.
You take title to $10,000 of stock, no matter what teh restricyions, you owe tax on $10,000 of income.
I suppose if you think you will lose money on the stock before you can sell, you might decline it (How confident in your company are you?). Taking a capital loss probably does not make up for the tax paid to receive it unless you have other capital gains to deduct it against.
If receipt of the shares is taxed as ordinary income, do you still have to pay capital gains if you sell them? And what would the cost basis be?
RSU at my company are handled as follows.
We get a grant of stock that vest over 3 years.
Every six months the company gives us 1/6 of the stock grant. At that time they immediately sell 28% of the stock to cover taxes which they send to the government. The rest of the stock is now available for me to do with as I please. The Cost basis for the stock is the price on the day those shares vested. The total value of the vested stock is reported on my W2 as ordinary income along with the taxes paid.
If I sell my remaining stock more than a year after it vested the difference between the price on the day it vested and when I sell it is long term capitols gains. If I sell them less than a year from when they vested this is short term capitol gains.
Sigh. So worst case scenario : you accept the grant, and are not allowed to sell the shares for a year. You pay $2800 tax.
After a year, the company share price tanks and is now worth $0. You’re telling me that you will have paid $2800 to the government on income taxes for income you never actually got.
Theoretically, someone could create such a scheme where you would go bankrupt from the taxes and not get a penny. Like if you were a company founder, and you got 1 million dollars granted to you, so you have to pay $280,000. You spend all your savings or borrow the money to pay the tax bill.
After a year, when you want to sell the stock, say it has tanked to less than $280,000 of stock. Does this make you bankrupt?
You have gotten income - the stock. You just haven’t gotten cash. It’s like finding a bunch of gold. You still owe taxes on the value of the gold, even if you didn’t find any cash. It’s just that in this case, you are prevented from selling the gold for a while. Sure, it’s a risk, and that’s why the stock is not just awarded. You are taking on some level of risk, though for most companies that do stock grants, it’s a small one.
Or, like gazpacho a company may award some equivalent cash value for some of the stock to pay taxes. Or some other arrangement.
I don’t think that the taxable event is when you receive the stock grant. I think it is when you receive the stock and can sell it. In my case the grant is at the review period and I cannot sell any stock for six months but the amount of ordinary income is not decided until the stock vests. So if the price goes down between the time of the grant and its vesting I am not in the position on owing taxes on income I really never received.
Accepting an RSU grant means you agree to the terms of the grant and the responsibility for executing those terms, including the tax ramifications. The details of your particular plan will be made available to you by the company granting you the RSUs.
It’s possible, though not typical, that a given RSU agreement involves upfront costs for the grantee.
More typically, the stock vests over time, and under Federal IRS guidelines, upon vesting income tax is withheld just as with ordinary income (typically 28% or so) and is paid by selling that amount of stock or a conversion to cash of that amount.
Vested stock can then be taxed like short or long-term income depending upon when the grantee sells the rest of the vested stock; at that point they may owe more or less than the amount withheld at vesting.
You will not “owe tax” if the value of the grant at vesting is zero. I can’t think of any typical reason to reject a grant. It’s basically a way of binding you to a Company by deferring income until it vests, and for the most part it’s handled sort of like a bonus, so people don’t think of it as deferring current income.
But you are thinking common sense and not letter of the gaziillion laws on the matter.
So what if there is no law at present ? What if there is a NEW law ?
One law it liability… notionally the receiving of the stock could be a liability…
“Because the company has been sued, but doesn’t have the cash or liquid asset to cover damages, all those people who owned a share, as of 1st April, must pay $20 per share, or lose 20% of their shares”.
Well, if the question you are asking is “Why is this necessary?”, it is because the accounting department has to have a record of your acknowledgement of the grant. These are Restricted Stock Units, and (I suspect) they are restricted in that you do not actually receive ownership until they vest. This stock is in limbo. They can’t sell it to anyone else, but you can’t sell it, either. If they gave you the actual stock certificate, the certificate itself would be recorded and that would be the acknowledgement of your receipt. But, without that, they need to be able to prove that they awarded this stock in 2014, not three years (or whenever it vests); for accounting purposes.
Usually, the tax is not due until it vests. If the stock drops to zero worth before it vests, you owe no tax. This really isn’t a bad deal, it kind of like the company said “we’ll give you 20 shares in three years”, since, that is really what they are doing (well, except for the number of shares, which I don’t know).
So RSUs are by law taxed at time of vesting, not time of grant. There’s no risk involved in paying the taxes - the only risk would come in after the shares vest - if they fall after that, you lose money. But you could safely avoid that by selling off all the shares on the day of vesting. My company handled it the same way above posters said - a 500 share vesting would only actually net you 370 shares or so - they’d sell off a portion and use that for tax withholding.
Note that the linked article also talks about Restricted Stock, which is a different beast than RSUs - in that case, you can choose whether to pay the taxes at grant or at vesting, and if you pay them at grant, you are taking a risk that the share price will fall and you won’t get those taxes back. That’s the 83(b) election mentioned in the quote.
We’ve been offered the choice - as the vesting day gets near, we can have them sell stock to cover the taxes, or write a check to cover taxes - which we’ve done when we’ve believed that the stock will go up in value (the 90s were so good). But you do need to acknowledge the grant - sometimes there is fine print in accepting the grant - my husband’s former company started putting a loyalty clause in the grant - by accepting the grant you were agreeing not to leave the company until the grant vested (probably completely not enforceable - but he was gone before it started showing up. And the company was apparently shocked to discover that they had a lot of grants that people just didn’t accept from people not willing to promise they’d be around in three years).