Executives and key employees often receive stock-based compensation in addition to their regular salaries and bonuses. If you receive restricted stock, reviewing the potential tax consequences well before December 31 can help you make informed decisions and identify valuable planning opportunities.
Your tax situation may be affected if you have recently received a restricted stock award, expect to receive one soon, have shares vesting in 2026, or have sold shares during the year or are considering a sale.
The timing of these events — along with certain tax elections you may be eligible to make — can influence how much income you report, how that income is taxed, and what opportunities may be available for your 2026 and future tax planning.
UNDERSTANDING RESTRICTIONS AND VESTING
Restricted stock generally involves receiving company shares at little or no cost, subject to certain conditions. A common restriction requires you to remain employed by the company until a specified date. If you leave before meeting the requirement, you may forfeit the shares.
For federal income tax purposes, you generally recognize compensation income when the shares vest, unless you have made a valid Section 83(b) election.
Vesting typically occurs when the applicable restrictions lapse and your ownership is no longer subject to a substantial risk of forfeiture.
At vesting, you generally recognize compensation income equal to the fair market value (FMV) of the shares, less any amount you paid for them. This income is generally subject to ordinary federal income tax rates, which can reach 37%, as well as applicable state and local taxes.
What happens when you sell vested shares?
Once your restricted stock vests, the value included in your compensation income generally becomes your tax basis in the shares.
If you later sell the shares for more than that basis, the additional amount is generally a capital gain. If you hold the shares for more than one year after the relevant acquisition date, the gain may qualify for long-term capital gains treatment.
Most net long-term capital gains are taxed at federal rates of 0%, 15%, or 20%, depending on your taxable income and filing circumstances. The 3.8% net investment income tax (NIIT) may also apply, along with state or local taxes where applicable.
The holding period and tax treatment can differ if you make a Section 83(b) election, so it is important to consider the election when evaluating your overall tax position.
ELECTING TO PAY TAX EARLIER: THE SECTION 83(b) ELECTION
Section 83(b) of the Internal Revenue Code allows you to elect to recognize income when restricted stock is transferred to you rather than waiting until the shares vest.
Under this election, your compensation income generally equals the fair market value of the shares when transferred, less any amount you paid for them.
That income is generally subject to federal income tax and applicable employment taxes, as well as state and local income taxes where relevant.
Potential benefits of an 83(b) election
One potential advantage is that future appreciation in the stock may be taxed as capital gain rather than as additional compensation income.
The election also generally starts the capital gains holding period when the shares are transferred to you. If you hold the shares for more than one year before selling, subsequent appreciation may qualify for long-term capital gains treatment.
An election may be worth considering when the stock’s fair market value is relatively low at the time of transfer or when substantial appreciation is anticipated before vesting.
Potential disadvantages and risks
The election requires you to recognize income earlier, even though you may not be able to sell the shares to cover the resulting tax liability.
Depending on the value of the stock and your other income, this additional income could push you into a higher tax bracket or affect your exposure to other taxes and income-based limitations or phaseouts.
There is also a risk if you later forfeit the shares. In general, you cannot deduct the compensation income you previously recognized simply because the shares are forfeited. You may be entitled to a capital loss for certain amounts you paid for the shares, subject to the applicable tax rules.
Important deadline: If you choose to make a Section 83(b) election, you generally must file it with the IRS no later than 30 days after the stock is transferred to you. Missing this deadline can eliminate the opportunity to make the election for that transfer.
2026 RESTRICTED STOCK TAX PLANNING CONSIDERATIONS
Your planning options will depend largely on where you are in the restricted stock award cycle. Consider the following situations.
1. You receive restricted stock in 2026
If you receive restricted stock during 2026, you may need to decide whether to make a Section 83(b) election within the applicable 30-day period.
The decision should take into account the current value of the shares, the expected vesting schedule, the possibility of future appreciation, your ability to pay the tax upfront, and the risk of forfeiture.
We can help you compare different scenarios and evaluate whether making the election could produce a tax benefit over time.
If you do not make the election, the award generally will not create compensation income at the time of transfer. Instead, you will generally recognize compensation income when the shares vest, assuming the restrictions remain in place.
If you make the election, or have already made it during 2026, you should consider how the additional income affects your overall tax position for the year.
Depending on your circumstances, possible planning measures may include deferring other income into 2027 where permitted or accelerating deductible expenses into 2026.
2. Your restricted stock vests in 2026
If your shares vest during 2026, the tax consequences depend in part on whether you made a Section 83(b) election.
If you made a valid election when the shares were transferred, vesting generally does not create additional compensation income.
If you did not make the election, you will generally recognize compensation income based on the shares’ fair market value at vesting, less any amount paid for them.
This income may affect your marginal tax rate, your exposure to the NIIT, and other income-sensitive tax provisions. Reviewing the expected vesting value before year-end can help you prepare for the resulting tax liability and consider available planning opportunities.
3. You sell some or all of your shares in 2026
If you sell restricted stock during 2026, you will need to determine your tax basis, the applicable holding period, and whether your gain or loss is short-term or long-term.
These calculations depend partly on whether you made a Section 83(b) election and when the shares were transferred, vested, and sold.
A substantial gain may increase your overall tax liability and could cause you to become subject to the 3.8% NIIT or increase the amount of NIIT you owe.
If you hold other investments that have declined in value, you may want to consider whether selling some of those investments could offset capital gains. This approach is commonly known as tax-loss harvesting. Capital loss deduction limitations and other tax rules apply.
Depending on your circumstances, deferring other income or accelerating deductible expenses may also help manage your overall tax position.
REVIEW YOUR RESTRICTED STOCK BEFORE YEAR-END
Restricted stock can affect your taxes at several stages, including the initial award, vesting, and the eventual sale of your shares.
As December 31 approaches, review the restricted stock transactions that have already occurred during 2026, any awards or vesting events expected before January 1, 2027, and any sales you are considering.
If you have recently received an award, pay particular attention to the 30-day deadline for a potential Section 83(b) election.
Contact us for assistance. We can help you evaluate whether an election makes sense for your circumstances and determine how your restricted stock awards, vesting events, and share sales should be incorporated into your year-end tax planning.
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