What Is Restricted Stock, and Is It Taxable? A Guide for High-Income Families

By Kevin Luu, Co-Founder and Chief Learning Officer. Reviewed on 2026-09-30.

Restricted stock is real company shares given or sold to you as pay, which you can lose if you leave before they vest. Yes, it is taxable: unless you file an 83(b) election within 30 days of receiving the shares, the value of each batch is taxed as ordinary wage income when it vests, minus anything you paid for it. With an 83(b) election you are taxed on the value at grant instead, and growth after that is taxed as capital gain when you sell.

For a California or Washington household already earning $750,000 or more, that timing choice decides whether years of growth in a startup or biotech grant are taxed at wage rates or at capital gains rates. It is also a choice you get to make exactly once, in a 30-day window that often falls around the time you start a new job.

Restricted stock, RSUs and “restricted securities” are three different things

The search term “restricted stock” covers three ideas that are taxed and handled differently.

• Restricted stock (restricted stock awards, RSAs). Actual shares are transferred to you on day one. You may vote them and receive dividends, but the company can take them back (or buy them back at your cost) if you leave before the vesting date. These are most common at early-stage private companies, including many Bay Area and Seattle biotech and software startups. Shares you get by exercising stock options before they vest (“early exercise”) are also restricted stock.
• Restricted stock units (RSUs). A promise to deliver shares later. You own nothing until the shares arrive at vest. This is what most large public employers grant. Treasury regulations treat an unfunded promise to pay as not being property (Treas. Reg. §1.83-3(e)), so an 83(b) election is not available for RSUs. They are simply taxed as wages when shares are delivered. Our guide on whether RSUs count as income covers that case.
• Restricted securities. A securities-law term for shares acquired in unregistered, private sales from the company or one of its affiliates, for example through a private placement or an employee stock benefit plan. (Shares held by insiders and other affiliates are a related category, “control securities.”) “Restricted” here means resale limits under SEC Rule 144, not vesting. Tax is not the issue; the question is when and how you may sell.

The rest of this article is about the first category, where the tax rules give you a real decision.

How restricted stock is taxed without an 83(b) election

Under IRC Section 83, property you receive for work is not taxed while it is subject to a “substantial risk of forfeiture,” meaning you could lose it if you stop working there. When that risk lapses, the shares are “substantially vested” and you include in income their fair market value on the vest date, minus what you paid (IRS Publication 525, Restricted Property).

• It is wage income. Your employer reports it on your W-2 and withholds on it. For 2026, federal withholding on supplemental wages is typically a flat 22%, rising to a mandatory 37% on supplemental wages above $1,000,000 in the year (IRS Publication 15). At the 35% and 37% brackets, 22% withholding usually leaves a balance due in April.
• Payroll taxes apply. Medicare tax of 1.45% has no wage cap, plus the 0.9% Additional Medicare Tax on joint wages over $250,000. The 6.2% Social Security tax stops once the employee’s own wages for 2026 pass the $184,500 wage base, so for a highly paid employee it often does not apply to vesting income late in the year.
• Dividends on unvested shares are pay. Pub 525 treats dividends on restricted stock as compensation, reported on the W-2. If you made an 83(b) election, they are taxed as ordinary dividends instead.
• Your basis and holding period reset at vest. Your cost basis is the value you were taxed on, and the capital gains holding period starts at vest (Treas. Reg. §1.83-4). Hold more than a year after each vest for long-term rates on later growth.

The catch is that every dollar of growth between grant and vest is taxed as wages, at the highest rates you pay.

What the 83(b) election changes

An 83(b) election tells the IRS you want to be taxed now, on the value at transfer minus what you paid, instead of at each vest. After that, vesting is not a taxable event, your basis is what you paid plus what you reported, and later growth is capital gain when you sell. The holding period starts at grant.

The rules Pub 525 sets out are strict:

• You file a signed written statement or Form 15620 with the IRS no later than 30 days after the shares are transferred, and give a copy to your employer. Pub 525 describes no extension of that window.
• You cannot revoke it without IRS consent, which is given only for a mistake of fact about the transaction.
• If you later forfeit the shares, your loss is limited to what you actually paid for them. The tax you paid on the 83(b) income is not refunded.

When the shares are worth exactly what you pay for them (common for early employees who buy at fair market value or early-exercise options), the 83(b) income is zero. The election costs nothing in tax and starts the capital gains clock. That is the case where it is hardest to justify skipping it. Our guide to drafting the 83(b) election letter covers the mechanics.

Worked example: a $1.1 million California household joining a private biotech

Assumptions (all illustrative): a married couple in San Mateo County, W-2 income of $1.1 million, filing jointly. One spouse joins a private biotech and receives 100,000 restricted shares, paying nothing. Fair market value at grant is $1.00 a share. Shares vest 25% a year for four years. Assumed values at each vest: $3, $6, $10 and $15. All shares are sold at $15 more than a year after the final vest.

Marginal rates used: on wage income, about 53% (37% federal, 1.45% Medicare plus 0.9% Additional Medicare Tax, 11.3% California bracket plus the 1% Behavioral Health Services Tax on taxable income over $1,000,000, and 1.3% CA SDI for 2026). On long-term gains, about 37.1% (20% federal, 3.8% Net Investment Income Tax, and 13.3% California, since California taxes capital gains as ordinary income). California figures are 2025 rates, the latest published by the FTB.

In this scenario the election saves about $119,000. But it requires $53,000 of tax in year one on shares that cannot be sold, in a company that may never go public. If the spouse leaves after 18 months, three quarters of the shares go back and none of that $53,000 comes back. If the company fails, the $53,000 is not refunded; what remains is a capital loss on the $100,000 basis, which is worth less than the tax paid unless the household has capital gains to offset. Without the election, the household pays tax only on shares as they actually vest.

So the decision is a bet on two things: that you will stay through vesting, and that the stock will rise meaningfully from the grant value. A small spread between grant value and price paid makes the bet cheap. A large one makes it expensive.

How the same grant plays out in Washington

Washington has no tax on wages for 2026, so the wage-income rate in the example drops to roughly 39.9% (federal 37%, Medicare plus Additional Medicare Tax, and the 0.58% WA Cares premium). Long-term gains on the stock sale are taxed at 23.8% federally plus Washington’s 7% capital gains tax on gains above the state standard deduction ($278,000 for 2025, the latest published; 9.9% on taxable gains over $1,000,000), per the Department of Revenue. The gap between wage and capital gains rates is narrower than in California, so the 83(b) bet pays less, though electing can still come out ahead when the income at grant is small.

One change to plan around: Washington enacted a 9.9% income tax on AGI over $1,000,000 starting January 1, 2028 (WA DOR). Grants vesting in 2028 and later may face it. How it interacts with the capital gains tax awaits DOR guidance.

Decision checklist before day 30

1. What is the 83(b) income? Fair market value at transfer minus what you pay. If it is zero or close to it, electing is usually low cost.
2. Can you pay the tax from cash you will not need? Treat the tax as money that may never come back.
3. How likely are you to stay through vesting? Be honest about a four-year commitment with young children and two careers.
4. How concentrated is the household already? If one spouse also holds large RSU positions at a public employer, adding a private bet raises risk. Our investment risk management work starts here.
5. Is a liquidity event possible? A tender offer or acquisition before vest changes the math and the timing.
6. Who mails it, and how will you prove it? Send it with tracking, keep the receipt, and give your employer a copy the same week.

Common mistakes with restricted stock

• Filing an 83(b) for RSUs. It does not apply. RSUs are taxed at delivery.
• Missing the 30 days because the paperwork arrived during onboarding. The clock starts at transfer, not when HR follows up.
• Trusting the withholding. At a 37% bracket in California, 22% federal withholding on each vest leaves a gap. Plan estimated payments or adjust your W-4. Our page on withhold-to-cover versus sell-to-cover explains how shares are used to pay the tax.
• Losing the basis record. Brokers often report a cost basis of zero for compensation shares. Without your W-2 and 83(b) records, you can be taxed twice on the same income.

What to write down for your kids

An 83(b) election is a rare money decision with a clear date, a clear bet and a known outcome years later. That makes it a good entry for the family record: what the grant was, why you did or did not elect, what you were willing to lose, and how it turned out. As Kevin Luu, Co-Founder and Chief Learning Officer, puts it: “Your kids don’t need to inherit your portfolio. They need to inherit your decision-making process.” Our family governance work uses the FamilyKnowledge® System for exactly this kind of entry.

Frequently asked questions

Is restricted stock taxed twice?

No, if basis is tracked correctly. You pay wage tax on the value at vest (or at grant with an 83(b)), and that amount becomes your cost basis. When you sell, only growth above that basis is taxed as a capital gain. Double tax happens when a broker form shows zero basis and nobody adjusts it on the return using the W-2 and vesting records.

Do I pay tax when restricted stock is granted?

Only if you file an 83(b) election. Without it, nothing is taxed at grant, and each batch is taxed as wages when it vests. With the election, you report the value at grant minus what you paid, which is often small at an early-stage company. Either way, selling later triggers capital gains tax on growth above your basis.

What happens to restricted stock if I leave before it vests?

Unvested shares typically go back to the company, often bought back at the price you paid. Without an 83(b), you never paid tax on them, so there is nothing to recover. With an 83(b), you lose the tax you paid on those shares; your deductible loss is limited to what you paid for the stock minus anything you received back.

Next step

If a restricted stock grant or early-exercise offer is on the table, run the numbers with your grant value, expected tenure and cash on hand before the 30 days start. Our tax management team models this as part of the Tax & Wealth Assessment.

This is general education, not individual tax advice. The right choice depends on your family’s full picture, and your tax adviser should review any election before you file it.

Written by

Kevin Luu

Co-Founder and Chief Learning Officer, Bright Advisers

Kevin has advised high-income W-2 tech and biotech families since 2015, and leads the education-first Age Five Family Office from Brea, California.

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