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J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return by J.K. Lasser Institute

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2.17 Restricted Stock

If in return for performing services you buy or receive company stock (or other property) subject to restrictions, special tax rules apply. Unless you make the Section 83(b) election discussed below, you do not have to pay tax on the stock until the first year in which it is substantially vested, which is the year that the stock either becomes transferable or is not subject to a substantial risk of forfeiture. A risk of forfeiture exists where your rights are conditioned upon the future performance of substantial services. In the year the property becomes substantially vested, you must report as compensation (wages) the difference between the amount, if any, that you paid for the stock and its value at the time the risk of forfeiture is removed. The valuation at the time the forfeiture restrictions lapse is not reduced because of restrictions imposed on the right to sell the property. However, restrictions that will never lapse do affect valuation.

SEC restrictions on insider trading are considered a substantial risk of forfeiture, so that there is no tax on the receipt of stock subject to such restrictions. However, the SEC permits insiders to immediately resell stock acquired through exercise of an option granted at least six months earlier. As the stock acquired through such options is not subject to SEC restrictions, the executive is subject to immediate tax upon exercise of an option held for at least six months.

If the stock is subject to a restriction ...

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