Sale of Restricted Stock reported on a 1099-MISC?

[TxLaine]

My client sold some restricted stock in 2021, for which he had filed an 83b and paid the tax at the time of exercise in 2016. His employer reported the 2021 sales to him on a 1099-MISC form, though? Has anyone heard of this?

[qbteachmt]

"The 83(b) election is a provision under the Internal Revenue Code (IRC) that gives an employee, or startup founder, the option to pay taxes on the total fair market value of restricted stock at the time of granting. The 83(b) election applies to equity that is subject to vesting."

You cannot sell something until you own it.

[TxLaine]

The shares sold were vested. Doesn't that mean the TP owned them, and that the sale is capital gains income, not "Other Income"?

[sjrcpa]

Depending on the type of stock plan, the employee may not have held the shares long enough to qualify for capital gain treatment. It could be Ordinary Income. But a 1099-MISC presentation is odd.

[qbteachmt]

I thought the question had to do with paying taxes at the time of vesting/grant; vs because of the sale. The value in 2016 is the basis and that would be long term gain, if that was the vesting date. But the tax and valuation could have been at the point of the granting, and it wasn't vested on that same date.

[qbteachmt]

I really like Investopedia articles. See if these two help:

https://www.investopedia.com/articles/financial-advisors/110915/restricted-stock-units-what-know.asp

https://www.investopedia.com/terms/r/restricted-stock-unit.asp

[qbteachmt]

I have a pretend example that I think, simplified, might help:

I hire you and include the promise of shares as part of your compensation package. For retention, you get Granted in the second year, and Vested in each round of granted shares, 2 years after the grant date. The value of the grant is reportable and taxed on the W2 each time. The shares are not yours to do whatever you want with, until they Vest. You decide to sell them each as they Vest, right away. That would be Ordinary income, not Gain.

[TxLaine]

So, if they did vest in 2016, though, they would be capital gains, right?

[sjrcpa]

Yes

[qbteachmt]

You stated they paid the tax in 2016 at the point of the grant?

https://www.investopedia.com/articles/tax/09/restricted-stock-tax.asp

I love those articles. Just google your topic and click on one of their links.

[qbteachmt]

Oh, make sure to notice that Restricted Stock and Restricted Stock Units have slightly different requirements and provisions.

[TxLaine]

I'm waiting to hear back from client as to exact vesting date...but ordinary income was recognized at grant date and tax was paid and 83b filed (2016).

But you are saying, if they vested in 2021, right before they were sold, it wouldn't be a (S/T) capital gain?

It is Restricted Stock (not RSU). Reading the Investopedia article, I believe confirms my understanding that this is not ordinary income (even if vested in 2021) but is a capital gain.

Right? It says right there under the 83b Election section, "capital gains treatment still applies."

[sjrcpa]

Is the company that issued the 1099-MISC a small biz? They my not know WTH they are doing when it comes to 1099s.

[TxLaine]

Doesn't look like a small biz to me: https://www.sri.com/

Nonetheless, I'll have him inquire as to 1099-MISC reporting.

[TxLaine]

Thank you, both, for your replies.

[qbteachmt]

The other times I've seen 1099-Misc is when the stock was purchased and sold the same date, because the employer set up a brokerage to front the funds to buy the shares on behalf of the employee and make the sale. Example:

Now that you are vested, you already also want to sell the stock, and technically, you have not paid for the stock as of the date of the sale. The brokerage buys the stock by loaning you the funds, then sells the stock for you, takes their fee, and forwards that difference to you for ordinary income.

Let us know what you learn.

[qbteachmt]

(wrong topic, sorry)