Restricted stock units (RSUs) are a relatively new financial creature. Similar to options, there’s a vesting period where the employee must satisfy certain conditions before the stock or its value is transferred (typically, there is a period of time and other conditions – e.g., work performance). Unlike stock options, there is no purchase involved. Instead, a certain number of units are allocated – or granted – to the employee, but there is no value or funding until after the employee has satisfied the vesting requirements.
After vesting, RSUs are transferable if the employee accepts the grant. Therefore, these instruments always have a value, in contrast to options that can decline in value by the time of vesting. The value of your RSUs is the closing market value of the stock price on the vesting date. That is also the point at which your tax liability is triggered, requiring you to pay withholding and income tax on the amount received.
Anyone receiving RSUs will most likely be required to file an 83(b) Election Form. The election must be filed with the IRS within 30 days of receiving or purchasing the RSUs. It effectively notifies the IRS that the RSU recipient is choosing to be taxed on their equity on the date the grant was made rather than on the vesting date. If an 83(b) Election Form is not filed, then the IRS will tax the recipient on the RSUs at the time they vest.
What is most important to understand here is that no matter which election is made, both options result in tax at the ordinary income tax rate. Also, the recipient will pay a long-term capital gains tax when the shares are sold. This means that making the proper 83(b) election is crucial to a sound long-term financial strategy. One more note: unlike some other IRS provisions, the 83(b) Election is strictly enforced. There are no exceptions and no relief is available for late filings. A copy of the Election Form must also be filed with the company.
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