Can Section 453 be used for sales involving stock options or restricted stock units (RSUs) from a private company?

Question

Tyler Smith · Accepted Answer

The application of Section 453 to sales involving stock options or restricted stock units (RSUs) from a private company is complex and generally limited, primarily due to the nature of these compensation instruments and how they are typically taxed. Section 453 generally applies to sales of property where at least one payment is received after the tax year of the sale, deferring capital gains. However, the timing of when capital gains arise from stock options or RSUs is crucial.

For incentive stock options (ISOs) or non qualified stock options (NSOs), ordinary income is typically recognized upon exercise (NSOs) or sale (ISOs, with AMT considerations). The subsequent sale of the stock, once acquired, can generate capital gains. If the stock itself, once vested and owned outright, is then sold in an installment sale to a third party, Section 453 could apply to defer the capital gains portion of that stock sale. The key is that the underlying asset being sold must be the stock itself, not the option to acquire it, and the gain being deferred must be a capital gain, not ordinary income recognized upon exercise or vesting.

Similarly, for RSUs, ordinary income is recognized upon vesting. Once the shares vest and are owned by the individual, if these shares are subsequently sold in an installment arrangement, Section 453 could then be used to defer the capital gains arising from the sale of those vested shares. It is important to note that any ordinary income component, whether from NSO exercise, ISO disqualifying dispositions, or RSU vesting, is not eligible for Section 453 deferral; it is taxed in the year it is recognized. Therefore, while Section 453 doesn't apply to the original grant or vesting event, it can apply to the capital gain realized from the installment sale of the vested stock acquired through these means, provided all other Section 453 requirements are met.