Here's my understanding (not trying to be pedantic, just trying to be clear, educate other readers, and learn where my understanding might be wrong)...
Restricted Stock Units (RSU): Have a grant date of the equity approval by the board. They vest on a schedule, typically a 1 year "cliff", then on a periodic basis thereafter (annually, quarterly, monthly, etc.) When an RSU grant vests, you are effectively "gifted/given the shares as compensation" in that year. At the time the grant is released to you, you "may" have options related to tax handling. In my case, I have 2 options, "none", and "net of sale". "None", means that I am not paying taxes at the time of vest, but am taking personal responsibility for 100% of taxes owed in that year (often requiring/resulting in quarterly estimated tax payments). "Net of sale" tax handling means that at the time of vest, a portion of the shares will be sold immediate (25% in my case) as an estimated tax payment. Regardless of initial tax handling, once the RSUs vest, the shares are yours and considered stock purchased at the current market price at vest. This is now your basis for future sales, and can be treated as normal stock with regards to taxes and other asset handling.
Incentive Stock Options (ISO): Have a grant date, and a strike price of the equity approval by the board. They vest on a schedule, typically a 1 year "cliff", then on a periodic basis thereafter (annually, quarterly, monthly, etc.) When an Option grant vests, you are now given the chance to "exercise" your "option to buy shares". Your chance to exercise has an expiration date (10 years in my case) and is often not required to be immediate in the year of the vest. When exercising options, you must buy the shares at the Stike Price value, so you must have cash available to complete the transaction. This triggers a taxable event in the year you exercise, and your liability will be based on the Market Price of your shares. Filing an 83b changes your tax liability to be based on the Strike Price of your shares, usually a significantly lower price than market price at time of sale.
Here's an example for both types.
TL;DR
1200 Shares, $1 Strike, $10 Short Term Price, $15 Long Term Price
- RSU Same-Day-Sale is $9,000, taxed on $12,000 basis (Garanteed)
- RSU Long Term Sale is $13,275, taxed on $12,000 basis (Speculative)
- ISO Same-Day-Sale is $7,800, taxed on $12,000 basis (Garanteed)
- ISO Long Term Sale is $14,100, taxed on $18,000 basis (Speculative)
- 83b ISO Same-Day-Sale is $10,500, taxed on $1,200 basis (Garanteed)
- 83b ISO Long Term Sale is $17,880, taxed on $1,200 basis (Speculative)
DETAILS
Grant Information
01/01/2010 Grant Date
4,800 Grant Shares
4 years Grant Vest
1 year Vest Cliff
1 Month Vest Frequency
48 Vest Periods
Restricted Stock Units (RSU)
Initial Grant Vest (Cliff)
12 Vest Periods
1200 Shares at Vest
$ 0.00 Cost
$ 10.00 Price at Vest
$12,000.00 Value at Vest
$12,000.00 Basis (Value at Vest)
$ 3,000.00 Taxes on Vest (Basis * 25% = Taxes at Vest)
300 Shares for Taxes
900 Remaining Shares
Scenario #1: Same Day Sale at Vest (Short Term Capital Gains)
900 Shares at Sale
$ 10.00 Price at Sale (Same as Price at Vest)
$ 9,000.00 Gross Profit on Sale (Shares at Sale * Price at Sale = Gross Profit)
$ 9,000.00 Net Profit on Sale (Gross Profit - Taxes at Vest = Net Profit)
Scenario #2: Short Term Capital Gains (<12 months)
900 Shares at Sale
$ 15.00 Price at Sale
$13,500.00 Gross Profit on Sale (Shares at Sale * Price at Sale = Gross Profit)
$12,000.00 Basis at Sale (Same as Value at Vest)
$ 1,500.00 Taxed Gross Profit (Gross Profit - Basis = Taxed Gross Profit)
$ 375.00 Taxes on Sale (Taxed Gross Profit * 25% = Taxes at Sale)
$13,125.00 Net Profit at Sale (Gross Profit - Taxes on Sale = Net Profit)
$ 3,375.00 Total Taxes Paid (Taxes at Vest + Taxes on Sale = Taxes Paid)
Scenario #3: Long Term Capital Gains (>12 months))
900 Shares at Sale
$ 15.00 Price at Sale
$13,500.00 Gross Profit on Sale (Shares at Sale * Price at Sale = Gross Profit)
$12,000.00 Basis at Sale (Same as Value at Vest)
$ 1,500.00 Taxed Gross Profit (Gross Profit - Basis = Taxed Gross Profit)
$ 225.00 Taxes on Sale (Taxed Gross Profit * 15% = Taxes at Sale)
$13,275.00 Net Profit at Sale (Gross Profit - Taxes on Sale = Net Profit)
$ 3,225.00 Total Taxes Paid (Taxes at Vest + Taxes on Sale = Taxes Paid)
Incentive Stock Options (ISO)
Initial Grant Vest(Cliff)
12 Vest Periods
1200 Shares at Vest
$ 1.00 Strike Price
$ 1,200.00 Value at Grant
WITHOUT 83b
Scenario #1: Same Day Sale at Vest (Short Term Capital Gains)
1200 Shares at Sale
$ 1.00 Strike Price
$ 10.00 Price at Sale (Same as Price at Vest)
$ 1,200.00 Cost of Shares (Shares at Sale * Strike Price) [b]<- This is a WASH and not Taxed[/b]
$10,800.00 Gross Profit on Sale (Shares at Sale * Price at Sale = Gross Profit)
$12,000.00 Basis at Sale
$ 3,000.00 Taxes at Sale (Basis at Sale * 25% = Taxes at Sale)
$ 7,800.00 Net Profit on Sale (Gross Profit - Taxes at Sale = Net Profit)
Scenario #2: Short Term Capital Gains (<12 months)
Exercise
1200 Shares at Sale
$ 1.00 Strike Price
$ 1,200.00 Cost of Shares (Shares at Sale * Strike Price)
Short Term Sale
$ 15.00 Price at Sale (Same as Price at Vest)
$16,800.00 Gross Profit on Sale (Shares at Sale * Price at Sale = Gross Profit)
$18,000.00 Basis at Sale
$ 4,500.00 Taxes at Sale (Basis at Sale * 25% = Taxes at Sale)
$12,300.00 Net Profit on Sale (Gross Profit - Taxes at Sale = Net Profit)
Scenario #3: Long Term Capital Gains (>12 months))
Exercise
1200 Shares at Sale
$ 1.00 Strike Price
$ 1,200.00 Cost of Shares at Exercise (Shares at Sale * Strike Price)
Long Term Sale
$ 15.00 Price at Sale (Same as Price at Vest)
$16,800.00 Gross Profit on Sale (Shares at Sale * Price at Sale = Gross Profit)
$18,000.00 Basis at Sale
$ 2,700.00 Taxes at Sale (Basis at Sale * 15% = Taxes at Sale)
$14,100.00 Net Profit on Sale (Gross Profit - Taxes at Sale = Net Profit)
WITH 83b
Scenario #1: Same Day Sale at Vest (Short Term Capital Gains)
1200 Shares at Sale
$ 1.00 Strike Price
$ 10.00 Price at Sale (Same as Price at Vest)
$ 1,200.00 Cost of Shares (Shares at Sale * Strike Price) [b]<- This is a WASH and not Taxed[/b]
$10,800.00 Gross Profit on Sale (Shares at Sale * Price at Sale = Gross Profit)
$ 1,200.00 Basis at Sale
$ 300.00 Taxes at Sale (Basis at Sale * 25% = Taxes at Sale)
$10,500.00 Net Profit on Sale (Gross Profit - Taxes at Sale = Net Profit)
Scenario #2: Short Term Capital Gains (<12 months)
Exercise
1200 Shares at Sale
$ 1.00 Strike Price
$ 1,200.00 Cost of Shares at Exercise (Shares at Sale * Strike Price)
Short Term Sale
$ 15.00 Price at Sale (Same as Price at Vest)
$18,000.00 Gross Profit on Sale (Shares at Sale * Price at Sale = Gross Profit)
$ 1,200.00 Basis at Sale
$ 300.00 Taxes at Sale (Basis at Sale * 25% = Taxes at Sale)
$17,700.00 Net Profit on Sale (Gross Profit - Taxes at Sale = Net Profit)
Scenario #3: Long Term Capital Gains (>12 months))
Exercise
1200 Shares at Sale
$ 1.00 Strike Price
$ 1,200.00 Cost of Shares (Shares at Sale * Strike Price)
Long Term Sale
$ 15.00 Price at Sale (Same as Price at Vest)
$18,000.00 Gross Profit on Sale (Shares at Sale * Price at Sale = Gross Profit)
$ 1,200.00 Basis at Sale
$ 180.00 Taxes at Sale (Basis at Sale * 15% = Taxes at Sale)
$17,880.00 Net Profit on Sale (Gross Profit - Taxes at Sale = Net Profit)