Restricted stocks conferred to employees, that is stocks that employees can transfer after vesting, are subject to certain tax rules that distinguish them from granted or fully vested stocks. The shareholder can, in fact, choose to either subject his or her shares to taxation at the time of vesting or at the time the shares are granted to him/her.
Under Section 83(b) election, the owner of granted, not vested, shares can elect to be taxed at his/her ordinary income within 30 days of granting.
The advantage of the election is that it benefits from the differential between ordinary income taxation and capital gains taxation. The ordinary income taxation (recently adjusted in the 2018 tax cuts) stands at 37% at their highest rate. On the other hand, the long-term capital gains tax ranges from a minimum of zero to a maximum of 20%, depending on the applicable tax rate.
If the shareholder of restricted stock chooses the 83(b) election, the taxation structure will be as follows: (1) upon granting, based on the value of the stock (at the ordinary rate), and (2) upon transfer (at the marginal capital gain rate). Without the election, the taxation will take place at vesting. As a result, if the value of the shares upon granting is nominal, the election will show its advantages.
Given the scenario, employers may want to alternatively consider granting stock options.