If I go to work for a private company and they give me stock in the company how is that treated from an income perspective?

Is the value of the stock just its par value (which can be nominal in a private company), or its value computed in some other way?

  • I don't know about the legal position, but my experience in that situation is that it becomes income when you sell it. After all, the stock that has a book value of say $20K today may be worth nothing by the time you file your tax return. (Been there, done that .) – jamesqf May 7 '18 at 4:20
  • @jamesqf: That would be the sensible way to treat it, too bad common sense doesn't necessarily mean much to the IRS (consider the treatment of cryptocurrency mining) – Ben Voigt May 7 '18 at 6:05
  • @Ben Voigt: Cryptocurrency isn't stock. All I can say is that's the way it worked for me, though of course that may just have been that the IRS never audited me :-) – jamesqf May 7 '18 at 17:43

It's complicated and if you are in this position, you may want to get some professional help or a good book.

There are different type of stock grants "unrestricted", "restricted" and "restricted units". They are all treated differently. Unrestricted is basically treated as regular income based on the fair market value of the stock at the time of grant. For a private company (that has stock) the fair market value is typically set by the board of directors a few times a year.

This can be potentially dangerous. You owe income tax on the stock grant, but you don't have an easy way to sell the stock and actually make some cash. Some people may chose NOT to accept the grant to avoid this problem.

A restricted grant has some "strings attached". Typically it's a vesting period, i.e. you have to be an employee for XXX years before the grant becomes yours. In this case, it creates a taxable event at the time of vesting. The same risk applies: if the stock isn't publicly (or otherwise) traded at the time of vesting, you may end up with a sizable tax bill, but no good way to turn your stock into liquid cash to pay the tax.

For restricted grant, you can also opt to file a 83(b). This means you agree to pay the income tax on the stock at the time of grant and not when it vests. This can make a lot of sense if the stock is still really cheap and you expect a steep increase over the vesting period.

The takeaway here is that you may have to pay taxes on gains that you haven't made yet with assets that you can't cash. If you are in AMT territory, things may get more complicated still. No, this does not make a lot of sense, but, yes, that's the way it is. Welcome to the US Tax code.

See http://www.fairmark.com/execcomp/grants.htm, https://www.schwab.com/public/eac/resources/articles/your_stock_awards.html

  • Note that the tax basis is whatever you paid taxes on, so if you file a 82(b), pay taxes on the price at time of grant, and the stock goes up, then you have to pay tax on the difference at the time of sale. – Acccumulation Jun 28 '18 at 20:59

In the UK, you pay income tax when the shares become yours, so you can sell them, on the difference between the value and what you paid. Usually people have to sell substantial amounts of shares to cover the income tax, the remaining shares are theirs and capital gains tax is paid when you sell.

  • that's the same in the US. The tricky part here, is that it's a private company. You can't sell the shares on the open market since it's not publicly traded – Hilmar May 7 '18 at 22:46

What income have you received as a part of this stock grant? None, I imagine. Therefore, there is no income tax owed.

This company may choose to pay dividends. You will receive cash and paperwork to file with your taxes, and income tax will be owed on that.

They might sell the business and you might (or might not) be bought out, any income you receive from that transaction will also be taxed.

  • I could be wrong, but stock grants (e.g. bonuses) with public companies are certainly income- I expect it would be the same with private companies. It just may be much harder to quantify. – D Stanley May 7 '18 at 15:08
  • 2
    This seems dangerously naive. There are tax scenarios where you have to pay tax on stock (grants or/and options) even if the stock is not tradable. People have gone bankrupt because of this. – Hilmar May 7 '18 at 15:25
  • Is money a necessary feature of income (hint, the IRS expects taxpayers to report barter income)? Is the organization expensing the equity grant in the year it's made? – user662852 May 7 '18 at 21:00

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