Is it Optimal to Accelerate the Payment of Income Tax on Share-Based Compensation?

Research output: Working paper

Abstract

The value of stock-based compensation is typically taxed as ordinary income to the employee at vesting, but subsequent gains on the stock are capital gains. I examine whether it is ever optimal for an employee to accelerate the payment of ordinary income tax in order for subsequent gains to be taxed at the lower capital gains rate. The employee may accomplish this, for example, by exercising a compensation option or making a Section 83(b) election (applicable to grants of restricted stock). I show that in general, accelerating the ordinary income tax payment is not optimal. However, when the employee faces portfolio constraints and can borrow to pay the tax, acceleration may be optimal.
Original languageEnglish (US)
Number of pages32
StatePublished - 2003

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