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Date:   Sat, 12 Jun 1999
From:   Murli

Hello Michael,

Thank you for a great website. I had a question about stock grants versus ISOs. What is the tax treatment for a stock grant (versus an option grant, essentially an exercise price of zero) that vests say over three years? Does the capital gains clock start at grant or at vesting? What I am trying to determine is if the dollar amounts are equal, is a stock grant better than an ISO?

Thanks,

Murli

Answer

Date:   Wed, 28 Jul 1999

Hello Murli,

Sorry I haven’t written back to you sooner.

How a stock grant is taxed depends on the circumstances.

(1) If the employer simply gives you the stock, no strings attached, the excess of the fair market value of the stock over any amount that you pay for it is ordinary compensation income, included in your W-2 income. The holding period for capital gains starts when you receive the stock.

(2) If the stock "vests" over time, the ordinary income to be reported will be the excess of the fair market value on the date the restrictions lapse over any amount you pay for the shares. The holding period for capital gains starts when the restrictions lapse and you report the income.

As an alternative when the stock "vests" over time, you may file an election under Internal Revenue Code Section 83(b) to disregard the restrictions. The election must be filed within 30 days after receiving the stock. If you make the election, the income will be taxed as explained in (1) above.

Is a stock grant better than an ISO? It depends. An option gives you an opportunity to participate in the investment market without making a current cash or tax investment. When you receive stock, you may have something of value that you can currently sell or give to a family member with fewer tax strings attached.

Good luck!

Mike Gray

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IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this answer was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.