Restricted stock is taxed as ordinary income when it vests, calculated on the fair market value of the shares on each vesting date minus anything you paid for them. That income lands on your W-2, gets hit with federal income tax at your marginal rate plus Social Security and Medicare, and then any later price movement becomes a capital gain or loss when you sell. A Section 83(b) election, filed within 30 days of grant, is the one lever that can change this timing.
Nothing Is Taxed at Grant
When your employer hands you a restricted stock grant, no tax is due. Under 26 U.S.C. ยง 83, property received for services is taxed only once it stops being subject to a substantial risk of forfeiture and becomes transferable.1Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection With Performance of Services Unvested restricted stock fits that description exactly: leave before vesting and you lose the shares.
This holds whether the shares were free or purchased at a discount. What matters is the forfeiture condition, not the price.
What You Owe at Vesting
Each vesting date is a taxable event. The fair market value of the newly vested shares, minus anything you paid, is treated as compensation. Your employer reports it on your W-2 and it’s taxed at your marginal federal rate.1Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection With Performance of Services For 2026, federal brackets run from 10% on the first $12,400 of taxable income for single filers up to 37% above $640,600.2Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
Payroll taxes apply on top. Social Security withholding is 6.2% on earnings up to the 2026 wage base of $184,500, and Medicare is 1.45% with no cap.3Internal Revenue Service. Topic No 751 – Social Security and Medicare Withholding Rates Once your Medicare wages cross $200,000 (single) or $250,000 (married filing jointly), an additional 0.9% Medicare surtax applies to the excess.4Social Security Administration. FICA and SECA Tax Rates
One quirk worth flagging. Dividends paid on restricted stock before it vests are treated as compensation, not qualified dividends, so they land on your W-2 rather than getting the lower dividend rate.
How Withholding Works
Because vesting can produce a large one-day tax bill, employers withhold before you take possession of the shares. The IRS classifies the income as supplemental wages, so federal withholding is a flat 22%. Anything above $1 million in supplemental wages from one employer in a calendar year is withheld at 37%.5Internal Revenue Service. 2026 Publication 15
Employers typically offer one of three mechanics. Net share withholding, the most common, holds back enough shares to cover the tax and delivers the rest. Sell-to-cover instructs the broker to sell just enough vested shares on the market to fund the withholding. A cash payment lets you keep every share by funding the tax from money already in your brokerage account.
Watch the gap. The 22% flat rate often falls short of an actual marginal rate in the 32% or 35% bracket, and the shortfall shows up as a balance due when you file. If a big vest is coming, run the numbers before April.
Selling the Shares
Once shares vest, they behave like any other stock you own. Your cost basis equals the fair market value already taxed as ordinary income at vesting, and any further price change is a capital gain or loss when you sell. Shares held for a year or less produce short-term gains taxed at ordinary rates; hold longer than a year and the long-term rates of 0%, 15%, or 20% apply, tied to your taxable income.6Internal Revenue Service. Topic No 409 – Capital Gains and Losses For 2026, the 20% rate hits above $545,500 for single filers and $613,700 for joint filers.
Losses can offset other capital gains dollar for dollar, and up to $3,000 of any remaining net loss can offset ordinary income each year, with the balance carrying forward.6Internal Revenue Service. Topic No 409 – Capital Gains and Losses
Higher earners face the 3.8% Net Investment Income Tax on top of capital gains rates. It applies to the lesser of your net investment income or the amount your modified adjusted gross income exceeds $200,000 (single), $250,000 (married filing jointly), or $125,000 (married filing separately). Combined with the 20% long-term rate, that produces a top federal rate of 23.8% on gains.
Check Your Cost Basis on the 1099-B
This is where restricted stock recipients routinely overpay. Broker 1099-B forms sometimes report cost basis as only what you originally paid for the shares, ignoring the fair market value already taxed as W-2 income at vesting. If you file the return without correcting that basis, you pay tax twice on the same dollars: first as compensation, again as a capital gain. Review the 1099-B against your vesting records and adjust the basis to the vesting-date fair market value.
The Section 83(b) Election
Section 83(b) lets you flip the default. Instead of waiting for each vesting date, you elect to include the fair market value of the shares (minus what you paid) in income for the year of the grant. Every dollar of appreciation after that is a capital gain when you sell, not ordinary income.7Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection With Performance of Services
The math shines when the grant-date value is low. Say you receive 10,000 shares worth $1 each, vesting over four years, and the stock reaches $20 by the final tranche. Without the election, ordinary income tax applies to whatever the shares are worth on each vesting date, potentially up to $20 per share. With the election, you pay ordinary income tax on $1 per share now, and the $19 of growth is taxed at long-term capital gains rates when you sell.
Filing the Election
The deadline is 30 days from the transfer of the stock. Miss it by a day and the election is permanently unavailable for that grant. If day 30 falls on a weekend or federal holiday, the deadline moves to the next business day.8Internal Revenue Service. Form 15620 – Section 83(b) Election
The IRS now publishes a standardized Form 15620 for the election. It asks for your identifying information, a description of the shares, the transfer date and tax year, the vesting restrictions, the per-share and total fair market value at transfer, anything you paid, and the taxable amount. Mail the signed form to the IRS service center where you file your federal return, using certified mail with return receipt so you can prove the postmark date.9eCFR. 26 CFR 1.83-2 – Election To Include in Gross Income in Year of Transfer Send a copy to your employer as well so their payroll records don’t withhold again at vesting.8Internal Revenue Service. Form 15620 – Section 83(b) Election
What Can Go Wrong
The election is irrevocable. If you leave the company before vesting and forfeit the shares, the tax you paid on the grant-date value is gone; the statute expressly denies a deduction for property forfeited after an 83(b) election.7Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection With Performance of Services Any capital loss is limited to what you actually paid out of pocket, which for free shares is zero.
The stock can also fall. File on shares worth $10 and watch them vest at $2, and you’ve paid ordinary income tax on $10 per share for something worth far less. The election is a bet that the shares appreciate and that you’ll stay long enough to keep them. It fits early-stage startup grants with a low valuation and real upside far better than large grants that are already worth serious money.
Restricted Stock Awards vs. Restricted Stock Units
The 83(b) election is only available for one of the two common equity structures, so the distinction matters. A restricted stock award (RSA) transfers actual shares at grant. You appear on the shareholder register right away, may receive dividends and vote, and because property has been transferred, you can file an 83(b) election within 30 days.10Fidelity.com. Restricted Stock Awards
A restricted stock unit (RSU) is a contractual promise to deliver shares later. No property is transferred at grant, so there is nothing to elect on. The 83(b) election does not apply to RSUs. You are taxed as ordinary income when the units settle and shares (or cash) are actually delivered, generally at vesting.
Section 83(i) Deferral for Private Company Employees
Employees at private companies can face tax on stock they cannot sell. Section 83(i) lets qualified employees defer the federal income tax for up to five years after the stock would otherwise be taxable.7Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection With Performance of Services
The deferral ends at the earliest of several events: the stock becomes transferable (including back to the employer), you become an excluded employee (a 1% owner, current or former CEO or CFO, or one of the four highest-compensated officers), the company goes public, five years pass from vesting, or you revoke the election.
Eligibility is narrow. The company must have no publicly traded stock and must operate a written plan granting equity with the same rights to at least 80% of its U.S. employees during the calendar year. The stock cannot carry a right to sell it back to the company for cash at vesting.7Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection With Performance of Services
Two limits are easy to miss. The deferral covers income tax only; Social Security and Medicare are still due at vesting or option exercise. And when the deferred income tax finally becomes due, the employer must withhold at the maximum federal rate in effect that year.