how are stock bonuses taxed — U.S. guide

How are stock bonuses taxed — U.S. guide

As an employee receiving equity, you likely wonder how are stock bonuses taxed and what steps you should take to limit surprises at tax time. This article explains U.S. federal tax rules for the most common equity awards — restricted stock awards (RSAs), restricted stock units (RSUs), incentive and non‑qualified stock options (ISOs and NQSOs/NQOs), employee stock purchase plans (ESPPs), and cases where cash bonuses are paid in stock — plus withholding, Section 83(b) elections, AMT, employer reporting, planning strategies, state and cross‑border issues, and practical examples.

As of 2026-01-23, according to IRS guidance and commonly used payroll practices, stock‑based awards remain taxed primarily as compensation when restrictions lapse or economic benefit is received; special rules (Section 83, ISO rules, ESPP look‑back discounts) and employer withholding obligations shape timing and amounts. Read on to learn how are stock bonuses taxed in typical scenarios and what actions employees and employers should consider.

Types of stock bonuses and equity compensation

Companies use stock bonuses to attract, retain, and align employees with long‑term performance. Although many arrangements are colloquially called “stock bonuses,” they differ economically and taxwise. Below are the common forms and key tax distinctions.

Restricted Stock Awards (RSAs)

An RSA is an outright grant of company shares that remain subject to forfeiture or other restrictions until vesting. Employees often receive share certificates or book‑entry ownership at grant, but they cannot freely sell or transfer until vesting conditions (time or performance) are met.

Tax basics for RSAs:

• The taxable event ordinarily occurs when restrictions lapse (vesting). At that time the employee recognizes ordinary compensation equal to the fair market value (FMV) of the shares less any amount paid for the shares.
• The employee’s tax basis in the shares equals the amount included in income at vesting (unless an 83(b) election is made — see below).
• An 83(b) election lets the employee elect to include the FMV at grant as ordinary income immediately; if made, future appreciation is taxed as capital gain on sale (but the election has risks).

Restricted Stock Units (RSUs)

RSUs are a promise to deliver shares (or sometimes cash equivalent) at vesting. Unlike RSAs, RSUs do not transfer actual shares at grant — the right to receive shares vests later.

Tax basics for RSUs:

• No Section 83(b) election is available for RSUs because no property is transferred at grant.
• The taxable event is typically at vesting or delivery: the employee includes ordinary income equal to the FMV of delivered shares (or cash) on that date.
• The employee’s basis is the amount included in income; subsequent sale of shares is capital gain or loss based on holding period beginning at delivery.

Stock Options (ISOs and NQSOs/NQOs)

Stock options give the holder the right to buy shares at a fixed exercise price. There are two main types with materially different tax outcomes.

Non‑qualified stock options (NQSOs/NQOs):

• On exercise, if the FMV exceeds the exercise price, the “spread” (FMV less exercise price) is ordinary compensation income for federal income tax and subject to payroll taxes.
• Employers typically must report the income and handle withholding; when shares are later sold, capital gain or loss is computed based on sale price less basis (basis = exercise price + ordinary income recognized at exercise).

Incentive stock options (ISOs):

• ISOs may qualify for favorable treatment: no regular income tax on exercise for the employee if ISO rules are met; instead, the bargain element (spread at exercise) is an adjustment for Alternative Minimum Tax (AMT) in the exercise year.
• If the employee holds the ISO shares for more than one year after exercise and at least two years after grant (the “qualifying disposition” rules), gains on sale are taxed as long‑term capital gain rather than ordinary income. If the holding periods are not met (a “disqualifying disposition”), ordinary income treatment applies to part of the gain.
• Employers do not receive a deduction for ISO gains unless there is a disqualifying disposition.

Employee Stock Purchase Plans (ESPPs)

An ESPP allows employees to buy company stock at a discount, sometimes using a look‑back provision to use a lower price from the offering or purchase date.

Typical tax points for qualified ESPPs:

• No tax at purchase if the plan meets statutory requirements; instead, tax is triggered on sale.
• If the employee holds shares for the qualifying period (two years from the offering date and one year from purchase), part of the gain may be ordinary income (often the lesser of the discount or the actual gain) and the remainder treated as long‑term capital gain.
• If the holding periods are not met, the discount (or part of it) is ordinary income on sale and the rest capital gain or loss.
• Form 3922 is used to report transfer of stock under an ESPP to the employee.

Cash bonuses paid as stock or share equivalents

Sometimes employers pay cash bonuses that are converted into stock or credited to a brokerage account as shares. These arrangements are typically treated as cash compensation for tax purposes, and the value converted to shares is taxable as ordinary income when the right to the payment is no longer subject to substantial restrictions. If the employer allows immediate delivery of shares with no forfeiture risk, taxation follows ordinary compensation rules at the time of payment or conversion.

Timing of taxation and tax character

A central question is when compensation is recognized: at grant, vest, exercise, or sale? The answer depends on the instrument.

Taxation at vesting (RSAs, RSUs)

For RSAs and RSUs the common taxable trigger is vesting or delivery:

• When restrictions lapse (or shares are delivered), the employee recognizes ordinary income equal to the FMV of the shares received minus any amount paid by the employee.
• That income is subject to income tax withholding and payroll taxes (Social Security and Medicare) unless special rules apply.
• The employee’s basis in the shares is the amount included in income at vesting/delivery. The holding period for capital gain treatment begins at the date shares are vested/delivered.

Example note: If an RSU vests with 100 shares at FMV $20 each, the employee recognizes $2,000 of ordinary income and a basis of $2,000. A later sale for $30 per share produces capital gain of $1,000 (total sale $3,000 less basis $2,000), short‑ or long‑term depending on holding period beginning at vesting.

Taxation at exercise and sale (options)

NQSOs:

• Exercise: ordinary wage income equals the spread (FMV at exercise minus exercise price). This is subject to income tax and payroll taxes and reported on Form W‑2.
• Sale: after exercise, capital gain or loss is the difference between sale price and basis (basis = exercise price + amount taxed as ordinary income at exercise). Holding period for capital gains begins on the exercise date.

ISOs:

• Exercise: no regular income tax on the bargain element if ISO rules are followed, but the bargain element is an AMT preference item for the exercise year and may trigger AMT.
• Sale: if sale meets qualifying disposition holding periods (2 years from grant and 1 year from exercise), the entire gain is taxed as long‑term capital gain; if not, the portion equal to the bargain element at exercise is taxed as ordinary income (disqualifying disposition).

Capital gains on disposition

When shares received from stock bonuses are sold, the sale produces capital gain or loss. The character (short‑term vs long‑term) depends on the holding period measured from the date the basis was established:

• For RSUs and RSAs (with no 83(b) election), holding period begins at vest/delivery.
• For RSAs with an 83(b) election, holding period begins at grant date.
• For options, holding period for shares acquired on exercise begins on the exercise date (ISOs have additional rules for qualifying dispositions).

Short‑term capital gains are taxed at ordinary income rates; long‑term capital gains enjoy preferential rates for most taxpayers.

Section 83(b) election

An 83(b) election allows an employee who receives restricted property (commonly RSAs) to elect to include the FMV of the property in income at the time of transfer (grant), rather than waiting until restrictions lapse.

Key points:

• Availability: Generally available for RSAs (property actually transferred at grant). Not available for RSUs because no property is transferred at grant.
• Deadline: The election must be filed with the IRS within 30 days of the property transfer. The employee should also give a copy to the employer and keep proof of mailing/filing.
• Mechanics: File a written statement with the IRS with required details (name, address, taxpayer ID, description of property, date of transfer, restrictions, FMV, amount paid). Follow IRS rules and keep copies.
• Benefits: If you expect significant appreciation, making the 83(b) election can convert future appreciation into capital gain taxed at sale (starting holding period at grant), often reducing total taxes if the gain qualifies as long‑term.
• Risks: If you pay tax at grant and later forfeit the shares (e.g., leave before vest), you will not get a refund for tax already paid. You also pay tax earlier, increasing current cash needs.

Practical advice: Consider 83(b) carefully for early‑stage or low‑FMV grants where initial tax is small; secure proof of timely filing and consult a tax professional.

Withholding, payroll taxes, and reporting

Employers generally must withhold federal income tax and payroll taxes on compensation realized from equity awards. The mechanics vary by award type and settlement method.

Withholding on stock awards and supplemental wages rules

Stock award payments often fall under the IRS rules for supplemental wages. Employers may use either the aggregate method (combine supplemental wages with regular wages and withhold based on the employee’s W‑4 and payroll) or the flat percentage method for supplemental wages paid separately. Historically, a common flat withholding rate used for supplemental wages is 22% (for amounts up to $1,000,000 in some IRS guidance), and higher rates may apply for larger supplemental payments — however withholding practice may change over time, and employers must follow current IRS rules and guidance.

In practice:

• For RSU vesting where shares are delivered, employers often withhold shares (sell‑to‑cover) or withhold a portion of shares to satisfy tax withholding; cash settlement versions may require separate withholding.
• For NQSO exercise, employers often report and withhold on the spread as wages.
• For ISOs, because no regular income is reported at exercise for qualifying ISOs, employers generally do not withhold federal income taxes at exercise (but payroll taxes may apply in certain cashless exercise or sell‑to‑cover arrangements).

Employees should not assume withholding covers their full tax liability — estimated tax payments or adjusted withholding may be needed.

Social Security, Medicare, and payroll tax treatment

Compensation recognized on stock awards is typically subject to Social Security and Medicare (FICA) taxes when it is treated as wages for federal income tax purposes. Note that Social Security wages are capped annually at the wage base limit set by the Social Security Administration; once an employee’s wages exceed the limit for the year, no additional Social Security tax applies but Medicare tax continues without a wage limit (and higher‑income employees may face an additional Medicare surtax). Employers must follow current wage base figures and reporting rules.

Forms and employer reporting (W‑2, Forms 3921/3922, 1099 where applicable)

Common forms employees receive:

• Form W‑2: Reports wages, tips and other compensation; ordinary income recognized at vesting or exercise (for NQSOs) typically shows up in Box 1 (federal wages) and related boxes for Social Security and Medicare wages.
• Form 3921: Issued for ISO exercises under Section 422(b); provides details of exercise date, exercise price, number of shares and FMV.
• Form 3922: Used to report transfers under an ESPP.
• Form 1099‑B (from broker): Reports sales of stock and is used to reconcile gains and losses with amounts reported as income. Broker statements show proceeds, and the employee must reconcile basis, which may differ from broker‑reported basis.

Keep all forms, grant agreements, and broker statements to ensure accurate reporting.

Alternative Minimum Tax (AMT) and ISOs

Exercising ISOs can trigger AMT because the bargain element (FMV at exercise minus exercise price) is an AMT adjustment in the year of exercise. Important items:

• If AMT is triggered the year you exercise, you may pay AMT on the spread even if you do not sell the shares.
• If you later sell in a qualifying disposition, some or all of the AMT paid may be recouped via AMT credit in later years, but the timing and availability of the credit can be complex.
• Planning to avoid or manage AMT includes staggering ISO exercises across years, exercising fewer options, or exercising after a drop in FMV.

Because AMT rules are complex and sensitive to individual circumstances, consult a tax advisor before large ISO exercises.

Special scenarios and settlement types

Certain settlement choices and award designs change tax timing or amounts.

Cash settlement vs share delivery (net share / sell‑to‑cover)

Companies may deliver shares in gross, deliver net shares after withholding, or pay cash equal to the value of vested shares:

• Sell‑to‑cover: The employer or broker sells enough shares at delivery to cover taxes, delivering the net shares to the employee; the income recognized is based on full FMV, and the amount withheld is reflected in the W‑2.
• Net share settlement: Employer withholds a number of shares to cover taxes and transfers the balance; similar tax treatment to sell‑to‑cover.
• Cash settlement: Employer pays cash instead of shares; taxation is ordinary wage income at settlement.

For tax basis: basis generally equals the FMV included as ordinary income, regardless of whether the employer withheld shares or cash to cover taxes.

Performance‑based vesting, double‑trigger and change‑in‑control

Performance vesting (time + performance metrics), single vs double‑trigger acceleration (e.g., acceleration on termination or on a change‑in‑control plus termination), and similar provisions affect timing:

• If vesting accelerates because a performance target is met or a change in control occurs, the taxable event usually happens at acceleration (unless structured otherwise).
• Double‑trigger vesting can delay tax recognition until both events occur, which may provide tax timing advantages for employees.

Employees should review plan documents to know the exact taxable triggers and consider tax timing when negotiating terms.

Early‑stage / startup equity considerations

For founders and early employees, stock grants often have low initial FMV. Key considerations:

• An 83(b) election is commonly used to lock in a small ordinary income amount at grant, converting appreciation into capital gain if shares are later sold after holding periods.
• Liquidity constraints: paying tax at grant may require cash that is difficult to raise; weigh the cash cost against long‑term tax benefits.
• Paperwork and valuation: ensure a defensible valuation (409A valuation for options) and maintain records proving grant dates and FMV.

State and local tax considerations

State and local taxes generally follow federal treatment for wage income, but residency and sourcing rules can create complexities:

• If you move between states in the year you vest or exercise, multiple states may claim income sourced to the period you lived or worked in each state.
• Some states have no income tax, while others tax ordinary income and capital gains differently; withholding rules differ by state.

Because state rules vary, discuss multi‑state situations with a tax professional.

Employer tax and deduction considerations

Generally, employers may deduct the amount an employee recognizes as compensation when the employee recognizes it for tax purposes (e.g., at vesting for RSUs or at exercise for NQSOs). For ISOs, the employer typically gets a deduction only if there is a disqualifying disposition. Employers also have withholding and payroll reporting obligations tied to compensation recognition.

Practical tax planning strategies

Employees can take practical steps to manage tax outcomes from stock bonuses.

• Consider an 83(b) election for RSAs when FMV is low and forfeiture risk is acceptable. Filing within 30 days is mandatory for validity.
• Time sales to meet long‑term capital gain holding periods where possible; remember the holding period for RSUs/RSAs begins at vest or grant (if 83(b) filed), and for options at exercise.
• If withholding on a stock settlement seems inadequate (sell‑to‑cover may only withhold a statutory percentage), consider increasing W‑4 withholding or making quarterly estimated tax payments to avoid underpayment penalties.
• For ISO exercises that may trigger AMT, model the AMT impact before exercising large blocks and consider spreading exercises across years.
• Maintain clear records: grant agreements, vesting schedules, 83(b) elections, broker statements and transaction confirmations.

Managing withholding and estimated tax payments

If employer withholding on stock settlements does not cover your total tax, you can:

• Increase withholding on wages via Form W‑4.
• Make quarterly estimated tax payments to the IRS and relevant state tax authorities.
• Sell sufficient shares at vest or shortly thereafter to cover anticipated taxes and estimated liabilities.

Monitor whether sell‑to‑cover or net share settlements leave you with insufficient liquidity to cover taxes or diversification needs.

Using 83(b) electively and recordkeeping

If filing an 83(b):

• File the 83(b) with the IRS within 30 days of grant (proof of timely filing is critical). Keep copies of the filed election and any mailing receipts.
• Provide a copy to your employer for payroll and withholding records.
• Retain the grant agreement, valuation support, and proof of any payment made for the shares.

Understand the downside risk: if the shares are forfeited you generally cannot get back taxes paid under an 83(b) election.

Examples and numerical illustrations

Below are short, realistic illustrations. These are simplified examples for clarity; actual tax owed depends on your marginal tax rate, state taxes, and other items.

1. RSA with and without 83(b)

• Grant: 1,000 shares at grant FMV $1.00, vesting in 4 years.
• No 83(b): If at vest the FMV is $10.00, when 250 shares vest first year, ordinary income = 250 × $10 = $2,500. Basis = $2,500. Subsequent sale price determines capital gain.
• With 83(b): Elect at grant when FMV $1.00; include 1,000 × $1 = $1,000 as ordinary income in grant year. Basis = $1,000. If shares appreciate to $40 at sale after holding, gain = $40,000 − $1,000 = $39,000 (capital gain if holding periods met). If forfeited later, the $1,000 tax is not refundable.

1. RSU taxed at vest then sale within/after a year

• Vest: 100 RSUs vest when FMV $50 → ordinary income $5,000, basis $5,000. If you sell 6 months later at $60: short‑term capital gain = (60 − 50) × 100 = $1,000 taxed at ordinary rates. If sold 18 months later, long‑term capital gain applies.

1. NQSO exercise and sale

• Option: exercise price $20, FMV at exercise $50 for 100 shares.
• On exercise: ordinary income = (50 − 20) × 100 = $3,000; basis = exercise price + ordinary income recognized = $2,000 + $3,000? (Common approach: basis = exercise price + amount included as ordinary income = $20 × 100 + $3,000 = $5,000). If you sell later at $70, capital gain = sale proceeds 7,000 − basis 5,000 = $2,000 (character depends on holding period after exercise).

1. ISO exercise triggering AMT then later qualifying sale

• Exercise 2,000 ISOs at $10 exercise price when FMV is $50 → bargain element = (50 − 10) × 2,000 = $80,000. That $80,000 is an AMT adjustment for the year of exercise and may create AMT liability.
• If shares are held and sold after meeting holding periods, the entire gain may be long‑term capital gain and regular tax may be lower; AMT credit may offset some AMT paid in earlier years.

International and cross‑border issues

Non‑U.S. residents or employees who relocate face additional complexity:

• Country of residence, source rules, tax treaties, and social security agreements can all affect where and how compensation is taxed.
• Timing of income recognition and double‑taxation relief (foreign tax credits) should be evaluated with cross‑border tax specialists.
• Employers may have different withholding obligations for nonresident employees.

If you are non‑U.S. resident or have worked in multiple countries around grant/vest/exercise, obtain specialist advice.

Compliance, deadlines, and recordkeeping

Critical deadlines and documents to retain:

• 30‑day deadline for Section 83(b) election (file with IRS and provide copy to employer).
• Retain grant agreements, vesting schedules, broker confirmations, Forms 3921/3922, Form W‑2, and broker 1099‑B statements.
• Employers must follow payroll and reporting deadlines for wages and withholdings.

Good recordkeeping reduces audit risk and eases tax filing.

Frequently asked questions (FAQ)

Q: Can I avoid tax on RSUs? A: Generally no — RSUs create ordinary income at vest or delivery. You may manage timing of sale to optimize capital gains after vesting but cannot avoid the ordinary income recognition on vest.

Q: What happens if I leave before vesting? A: If you forfeit unvested shares, you typically recognize no income for those forfeited shares (unless you made an 83(b) election earlier, in which case you already paid tax at grant and would not recover it).

Q: How does sell‑to‑cover work? A: To satisfy tax withholding at vest, the employer or broker sells enough shares to cover withholding liability and delivers the net shares to you. You recognize ordinary income on full FMV; the broker sale provides cash to pay withholding.

Q: When is AMT a risk? A: AMT risk commonly arises when exercising ISOs with a large bargain element in a year without a qualifying disposition. Modeling potential AMT before exercise helps manage risk.

References and further reading

As of 2026-01-23, authoritative primary sources and commonly used practitioner materials include:

• IRS: IRC Section 83 (property transferred in connection with performance of services) and IRS Topic 427 (stock options), Publication 525 (taxable and nontaxable income).
• IRS Forms: Form W‑2 instructions, Form 3921 (ISO exercises), Form 3922 (ESPP transfers), Form 1099‑B (broker reporting).
• Treasury and IRS guidance on supplemental wage withholding and AMT rules.
• Professional tax guidance and summaries from major accounting/tax firms and employee benefits advisories for practical implementation.

Sources: As of 2026-01-23, federal publications and IRS instructions remain the primary legal authority for U.S. federal taxation of stock compensation.

Further reading (recommend starting points):

• IRS materials on stock options and employee compensation (see Topic 427 and Publication 525).
• IRC Section 83 text and Treasury regulations on property transferred in connection with performance of services.
• IRS Forms 3921 and 3922 instructions for sample reporting details.

Note: State and international rules differ — seek localized guidance.

Next steps and practical help

If you receive stock bonuses, document the grant and vesting schedule, check whether an 83(b) election is appropriate, and model projected tax outcomes before large exercises or sales. If you need tools for managing trades and wallets, consider Bitget Wallet for custody and Bitget for trading and reporting support as part of your overall planning.

For personalized tax planning that considers your full financial picture, consult a qualified tax advisor familiar with equity compensation, AMT issues, and any state or cross‑border complexities.

Further explore Bitget features for managing digital asset custody and payroll‑to‑crypto flows, and keep your tax records organized to ease filing later.

End note: This article focuses on U.S. federal tax and common U.S. payroll practices; state, local, and international rules may materially change outcomes and readers should consult a qualified tax advisor for personalized advice.