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I'm looking for a general answer on how this situation is treated for tax purposes, not how to report this situation when doing my taxes (although that would be interesting as well). The numbers below are made up, but generally representative of the real numbers.

I worked for a private company, and as a bonus (of sorts), I was awarded $10,000 in company shares. The taxes for this award were withheld from my pay (not sure if this even matters).

I left the company six months later, and the company gave me the option to keep the shares or sell them back to the company. I chose to sell. The shares had lost value by that point, and I received a payout of $8,000.

So from a tax perspective, what actually happened? Did I receive $10K in income and take a $2K capital loss? Did I receive $8K in income?

Phil Sandler
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2 Answers2

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You likely received the shares as ordinary income for services of $10k, since they withheld taxes at granting. Separately, you likely had a short term capital loss on sale of $2k, since your holding period seems to have been under one year.

NL7
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Stock awards by employers are treated and taxed as salary. I.e.: you pay ordinary rate income tax, FICA taxes, State taxes etc. The fact that you got your salary in shares and not cash is irrelevant for tax purposes.

Once you got the shares and paid your taxes on them, the treatment is the same as if you got the salary and immediately bought the shares. Holding period for capital gains tax purposes starts at the time you paid your taxes on the award, which is the time at which you get full ownership (i.e.: vesting time, for the restricted stocks).

When you sell these stocks - you treat the sale as any other stock sale: you check the holding period for capital gains tax rates, and you do not pay (or get refund) any FICA taxes on the sales transaction.

So bottom line: You got $10K salary and you bought $10K worth of company stock, and you sold it at $8K half a year later. You have $10K wages income and $2K short term capital loss.

littleadv
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