RESTRICTED STOCK INFORMATION
Restricted Stock Basics
Selling Restricted Stock
RESTRICTED STOCK OPTIONS
Stock Options are complex transactions that require a substantial expertise to complete. In addition to knowledge of governmental regulations and taxing authorities, there are several different types of stock options with major variations in their holding periods, manner of exercise, and tax consequences. Because of these and other factors, the strategies to utilize these stock options effectively must be developed based on both the specific plan and the needs of each individual owner. In addition, many sellers of stock acquired through the exercise of employee options are in a control relationship with their company and, thus, subject to Securities and Exchange Commission rules 144 and 16(b).
Incentive Stock Options
The primary advantage of an Incentive Stock Option (ISO) is that no taxable event occurs, either at the time of grant or exercise of the option. Furthermore, any gain resulting from the subsequent sale of the shares will be treated as a long-term capital gain provided such sale takes place more than one year after the exercise date and also more than two years after the date the option was granted. Failure to satisfy these holding period requirements will cause at least a portion of the gain, and in certain circumstances the entire gain, realized upon the disposition of the stock to be treated as ordinary income. Also, even though the difference between the exercise price and the market value of the shares on the date of exercise does not create a taxable event, the amount of such difference, which is sometimes referred to as the "bargain element", is treated as an adjustment in calculating the alternative minimum tax.
ISOs are subject to a number of other conditions in addition to the holding period requirements. Among other things, they may not be granted with an exercise price of less than 100% of the market value of the stock on the date of grant. The Internal Revenue Code imposes certain other limitations on ISOs, and the issuing company may impose additional limitations as well.
Non-Qualified Stock Options
In the case of a non-qualified stock option, taxable events occur both at the time of exercise and upon subsequent sale. Additionally, under certain rare circumstances a taxable event may occur upon the granting of the option rather than at the time of exercise. Thus, tax liability may be incurred in connection with either the grant or exercise of the option although no sale has occurred to generate the funds to pay such tax liability.
Any appreciation occurring between the exercise and sale dates will be taxed at long-term capital gain rates (as opposed to ordinary income tax rates at the time of exercise), provided the shares are held for the requisite holding period prior to their disposition.
While Non-Qualified Stock Options receive less favorable tax treatment than ISOs, they do have certain attractive features. One of the most advantageous is the fact that they can be granted at a discount from the current market price.
Note: We emphasize that you should consult with your tax adviser to determine the effect of the exercise of options and the sale of stock (if applicable).
Donating Restricted Stock
Donating and gifting Restricted Stock is an important part of estate planning. In addition there are many programs of relevance to the wealthy.
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