Cost Basis on Stock

[stomachmonkey]

Asking for a friend.

Let's say they signed onto a project for 6 months and in partial exchange for time spent on said project they were issued a big chunk of shares.

Assume after the initial restriction period they cashed in a bunch.

The positions were a grant so did not cost friend anything out of pocket but since they were partial payment in kind for work performed could one reasonably and legally use the dollar value of time invested, what friend would have billed, as the cost basis for the shares.

This is mostly a question as to taxes, as in, the increased cost basis results in lower earned income.

Edit, or is the cost basis still the price per share when granted.

[ckelly78z]

I believe that any time that shares are traded, it goes on the declared value at the time (market value). The cost basis of the shares should be in lieu of the hourly rate of the time spent.

[stomachmonkey]

Originally Posted by ckelly78z

I believe that any time that shares are traded, it goes on the declared value at the time (market value). The cost basis of the shares should be in lieu of the hourly rate of the time spent.

I don't understand that answer.

Simple math.

Let's say the shares were at $1.00 and 100 shares were granted = $100.

Let's say the value of the work was $200.

If the shares were exercised at $3.00 per share, $300.

What is the cost basis, $100 or $200. Because it's not $0.00, at least it better not be.

[sammyg2]

He may have trouble declaring that income as anything other than short-term capital gains.

[stomachmonkey]

Originally Posted by sammyg2

He may have trouble declaring that income as anything other than short-term capital gains.

That's the question.

They have every intent to report the short term gains.

What's the cost basis in this scenario.

If they realized $300 on the sale it's not a gain of $300. It's either $100 or $200 depending on how the cost basis is calculated.

It's in their best interest if the cost basis can legally be the value of time put in vs the value of the shares at the time they were issued.

[MRM]

Here's a link to an explanation that might be helpful.

Grants or Awards of Stock

I should not be trusted in any matters related to accounting or taxes, but I suspect the basis is going to be zero and he will pay short term capital gains on the entire amount realized in the sale.

[stomachmonkey]

Originally Posted by MRM

Here's a link to an explanation that might be helpful.

Grants or Awards of Stock

I should not be trusted in any matters related to accounting or taxes, but I suspect the basis is going to be zero and he will pay short term capital gains on the entire amount realized in the sale.

That works.

Thanks.

Net, net, looks like it does not matter a whole hell of a lot.

[sammyg2]

OK, I'm beginning to get it.
All the experience I have with cost basis related to STCG is based on purchase cost vs. sale price, I've never explored the possibility of claiming income from a grant as a form of salary.

IOW the question is way over my head. Good luck.

[stomachmonkey]

Originally Posted by sammyg2

OK, I'm beginning to get it.
All the experience I have with cost basis related to STCG is based on purchase cost vs. sale price, I've never explored the possibility of claiming income from a grant as a form of salary.

IOW the question is way over my head. Good luck.

According to MRM's link it seems to not matter a whole bunch. A restricted stock grant is considered a form of compensation and is pretty much taxed as straight income at whatever bracket the additional income it puts you in.

You can pay tax on the initial value then depending on gains or losses pay the delta or just pay on the realized gross gain at your personal tax rate.

Basically there is no way to really or materially offset the cost to acquire in order to lower the net earned income /reduce tax exposure.

[jwasbury]

Originally Posted by stomachmonkey

According to MRM's link it seems to not matter a whole bunch. A restricted stock grant is considered a form of compensation and is pretty much taxed as straight income at whatever bracket the additional income it puts you in.

This.

Technically, grants of stock and/or options to employees (or contractors) are supposed to be taxed to the recipient at the time they vest, meaning the recipient has the ability to cash them out. Employers should include the fair value in the employee's W-2 (or 1099-MISC in the case of independent contractor) at the date of vesting (or exercise in the case of options). The valuation is relatively simple in the case of a publicly traded company...not so much in the case of a private closely held company. Whatever was included in your W-2 or 1099-MISC becomes your basis in the stock if its held and sold at a later date.

[sammyg2]

Originally Posted by stomachmonkey

According to MRM's link it seems to not matter a whole bunch. A restricted stock grant is considered a form of compensation and is pretty much taxed as straight income at whatever bracket the additional income it puts you in.

You can pay tax on the initial value then depending on gains or losses pay the delta or just pay on the realized gross gain at your personal tax rate.

Basically there is no way to really or materially offset the cost to acquire in order to lower the net earned income /reduce tax exposure.

That's kinda sorta what i thought but didn't want to risk looking foolish by being wrong. I know, when has that ever stopped me

I get a stock grant every year as part of a long term incentive program and it kills me on taxes.
Coincidentally i'm dealing with the IRS right now on an issue relating to it back in '16.
When the bonus matures and is distributed, the company sells off enough shares to cover the taxes and sells the rest to give to me the $$$.
I get it in a payroll check and the amount awarded is handled just like salary.

but the good ole IRS somehow decided that it was NOT already included, and wants me to pay taxes on it, Again.
For some reason they don't recognize that I received only a part of the grant because the rest was sold off .... TO PAY THEM!
And of course they want interest and penalties for under-reporting etc.

So I hired a pro who is crunching numbers and thinks he'll not only get them off my arse, but will put a few grand in my pocket from an amended return because I paid too much.
And that's good.

[jwasbury]

Originally Posted by sammyg2

That's kinda sorta what i thought but didn't want to risk looking foolish by being wrong. I know, when has that ever stopped me

I get a stock grant every year as part of a long term incentive program and it kills me on taxes.
Coincidentally i'm dealing with the IRS right now on an issue relating to it back in '16.
When the bonus matures and is distributed, the company sells off enough shares to cover the taxes and sells the rest to give to me the $$$.
I get it in a payroll check and the amount awarded is handled just like salary.

but the good ole IRS somehow decided that it was NOT already included, and wants me to pay taxes on it, Again.
For some reason they don't recognize that I received only a part of the grant because the rest was sold off .... TO PAY THEM!
And of course they want interest and penalties for under-reporting etc.

So I hired a pro who is crunching numbers and thinks he'll not only get them off my arse, but will put a few grand in my pocket from an amended return because I paid too much.
And that's good.

Sammy,

How that usually works is the "grant" that matures as you phrase it, is fully included in your W-2 as wage income, subjected to income tax withholding, FICA, medicare, etc. The sale of the stock is typically also reported as income to you on Form 1099-B (gross proceeds from sale of stock). You need to report those gross proceeds on Schedule D in your 1040 regardless of it being a duplicate of income reported on your W-2, but your basis in the stock is equal to the income included on your W-2 and in an immediate sale case you describe, there should be virtually zero gain or loss on the stock sale and therefore no double taxation.

Hope that's helpful.

[sammyg2]

Originally Posted by jwasbury

Sammy,

How that usually works is the "grant" that matures as you phrase it, is fully included in your W-2 as wage income, subjected to income tax withholding, FICA, medicare, etc. The sale of the stock is typically also reported as income to you on Form 1099-B (gross proceeds from sale of stock). You need to report those gross proceeds on Schedule D in your 1040 regardless of it being a duplicate of income reported on your W-2, but your basis in the stock is equal to the income included on your W-2 and in an immediate sale case you describe, there should be virtually zero gain or loss on the stock sale and therefore no double taxation.

Hope that's helpful.

I believe you nailed it perfectly.
But then again it all makes my head hurt.
Thank goodness for experts.