is there a penalty for early stock sales?

[chiver78]

my company was just sold, and as part of the transaction our stock is no longer being traded. for those employees with unvested options and restricted stock units (RSUs), the unvested shares are being pulled back and liquidated - we're getting the funds through payroll rather than our stock brokers. we've gotten notice that all appropriate taxes will be withheld, as if we were exercising the vested option, but will that be enough taxes withheld?

I know that there is a different tax rate for stock if you hold it short term vs. long term, but is there a penalty for liquidating the stock before it vests?

thanks!

[commentator]

Without looking anything up, the taxable income you are realizing because of this transaction will be ordinary income reported on your W-2. The only "penalty" is that you will not get the preferred lower rate for long term capital gains on this income.

Whether enough extra is withheld to cover the extra taxes is anyone's guess.

[chiver78]

so it's going to be on my W-2 because it's coming through payroll, that makes sense. I know that E-trade was pretty good about getting the taxes right, hopefully it will be about the same from my company. I guess I was unsure whether I would be hit with extra fees because it wasn't all allowed to fully vest. it sounds like that's not the case.

thanks!

[tskeeter]

chiver, there is no IRS penalty for early vesting of stock options/RSU's.

My bet is that, unless you are a senior executive, your options and RSU's were non-qualified. What that means is that any gains on the options/RSU's are taxed as ordinary income rather than at a preferential tax rate, such as capital gains.

Will the withholding be right? Probably not. What I've seen done in some cases is that the taxes are withheld at a flat 20% rate, which could be higher, or lower, than your marginal tax rate. This approach is used (and approved by the IRS) to prevent massive spikes in tax withholdings on periodic payments, such as bonuses. For employers, using a flat rate for everyone is much easier than trying to find out the correct marginal tax rate for each employee affected.