Question

T received restricted stock in 2019 from his employer for services rendered. The restriction required T to remain employed for one additional year, otherwise the stock would be forfeited. T was prohibited from selling the stock during that one-year period. The value of the stock at the time received was $8,000. In 2020, when the restrictions lapsed, the stock was worth $50,000. T has not sold the stock.

A. Assuming no §83(b) election was made, indicate the amount of income, if any, that would be taxable in each year: (Put a $0 on the line if no income needs to be reported.) 2019 Taxable Income ________________ 2020 Taxable Income ________________

B. Assuming T made the §83(b) election, indicate the amount of income, if any, that would be taxable in each year: (Put a $0 on the line if no income needs to be reported.) 2019 Taxable Income_______________ 2020 Taxable Income_______________

Answer 1

Section 83(b) election is a letter a taxpayer sends to the IRS letting them know they like to be taxed on their equity, such as shares of restricted stock, on the date the equity was granted to them rather than on the date the equity vests.

Situation A – 83(b) Election

In this example you timely file a Section 83(b) election within 30 days of the restricted stock grant, when your shares are worth $8,000. T is liable to pay ordinary income tax on $8,000 during 2019. Because you filed a Section 83(b) election, you do not have to pay tax when the stock vests, only on the later sale. Since the sale never happened, T doesn’t have to pay any tax during 2020.

Situation B – No 83(b) Election

In this example you do not file a Section 83(b) election. So T pays no tax at grant i.e. in the taxable year 2019 (because the shares are unvested), but instead recognize income of $50,000 when the shares vest and thus have ordinary income tax calculated on $50,000 for the year 2020.