1

When starting at my company, I was given some number of stocks -- these stocks vest in 1/3 increments, each 12 months over 3 years.

How are these stocks taxed with respect to long-term vs short-term gains? Is the Grant Date or the Vest Date used when determining the 12-month cutoff for long-term and short-term capital gains?

Real Data Example:

  • I was Granted the sum of stocks 7/2014
  • I had 1/3 of these shares Vest in 7/2015 and 7/2016

If I sell my shares that vested in 7/2016, how will they be taxed?

2

Fidelity has a good explanation of Restricted Stock Awards:

For grants that pay in actual shares, the employee’s tax holding period begins at the time of vesting, and the employee’s tax basis is equal to the amount paid for the stock plus the amount included as ordinary compensation income. Upon a later sale of the shares, assuming the employee holds the shares as a capital asset, the employee would recognize capital gain income or loss; whether such capital gain would be a short- or long-term gain would depend on the time between the beginning of the holding period at vesting and the date of the subsequent sale. Consult your tax adviser regarding the income tax consequences to you.

So, you would count from vesting for long-term capital gains purposes. Also note the point to include the amount of income you were considered to have earned as a result of the original vesting [market value then - amount you paid]. (And of course, you reported that as income in 2015/2016, right?)

So if you had 300 shares of Stock ABC granted you in 2014 for a price of $5/share, and in 2015 100 of those shares vested at FMV $8/share, and in 2016 100 of those shares vested, current FMV $10/share, you had $300 in income in 2015 and $500 of income in 2016 from this. Then in 2017 you sold 200 shares for $15/share:

  • 100 shares = LT CG, $700 total ($1500 - $500 paid - $300 income)
  • 100 shares = ST CG, $500 total ($1500 - $500 paid - $500 income)
2

Is the Grant Date or the Vest Date used when determining the 12-month cutoff for long-term and short-term capital gains?

You don't actually acquire the stock until it's vested, so that is the date and price used to determine your cost basis and short-term/long-term gain/loss. The grant date really has no tax bearing.

If you held the stock (time between vesting and sale) for more than one year you will owe long-term CG tax, if less than one year you will owe short-term CG tax.

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