To calculate the capital gain on restricted stocks, the following measures are utilized.
- Calculate the date of vesting and fair market value (FMV) for restricted stocks. Taxability occurs when restricted stocks are vested. Take note of the vesting date and the FMV of the stock during that time.
- To determine the cost basis, the FMV of the stock on the vesting date should be calculated. Your gain or loss when selling the stock will be determined by this amount.
- When you sell the stock, make sure to keep track of the sale date and price.
- To determine your capital gain or loss, subtract the cost basis from the sale price. A capital gain occurs if the sale price exceeds the cost basis. If the value decreases, you will experience a loss of capital.
- To determine the holding period, the time between the vesting date and the sale date should be taken into account. A long-term capital gain can be obtained by holding the stock for more than one year. Holding it for a year or less is considered a short-term capital gain.
- Determine the proper tax rate for short-term capital gains: Your ordinary income tax rate applies to short-term capital gains, while long-term capital gains have lower tax rates.
Here is an illustration of how to calculate capital gain or loss on restricted stocks:
On January 1st, Year 1, Henry is given restricted stock worth $4 per share. Henry is not allowed to sell the shares until January 1, 2018. In Year 2, the share price was $6 per share on January 1st. On January 8, Year 6, Henry sold the restricted stock at an average price of $8 per share. What was the capital gain that Henry recognized on the stock sale date?
Henry is entitled to ordinary income of $4 per share for the restricted stock when it is received, regardless of when it becomes unrestricted. The basis for Henry is the amount of ordinary income recognized per share. By selling at $8 per share on January 8, Year 6, Henry recognizes a long-term capital gain of $4 ($8 - $4) per share.
Example Two:
On August 18, 2023, Sara will acquire 300 shares of restricted stock at the price of $50 per share. Sara has the ability to transfer the stock without forfeiture. As of December 3, 2023, the shares are valued at $53 per share on the market. Sara is obligated to hold the shares until April 9, 2024, when she will sell them at $56 per share. What is the amount of short-term capital gains that Sara will receive in 2024?
Restricted stock includes the fair market value (FMV) of the stock in gross income at the earlier of :
(1) the time the stock is transferable by the employee or
(2) the stock is not subject to forfeiture. Because the stock is not subject to forfeiture and is transferable by Sara on August 18, 2023, Sara will recognize $15,000 (300 × $50) of stock in her ordinary income in the year received.
Sara's stock's basis when sold is $15,000. The employee's basis is equal to the amount of income recognized. Sara will acknowledge a capital gain of $1,800 because 300 * $56 = $16.800. Sara's short-term gain is due to holding the stock for less than one year.
