Restricted Property: Taxable and Nontaxable Income (2025 IRS Guide)

This guide covers “Restricted Property” within taxable and nontaxable income. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.

Adapted from Publication 525 (2025), Taxable and Nontaxable Income, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.

Context for these rules

In most cases, you must include in gross income everything you receive in payment for personal services. In addition to wages, salaries, commissions, fees, and tips, this includes other forms of compensation such as fringe benefits and stock options.

You should receive a Form W-2 from your employer or former employer showing the pay you received for your services. Include all your pay on Form 1040 or 1040-SR, line 1a, even if you don’t receive Form W-2, or you receive a Form W-2 that doesn’t include all pay that should be included on the Form W-2.

If you performed services, other than as an independent contractor, and your employer didn’t withhold social security and Medicare taxes from your pay, you must file Form 8919, Uncollected Social Security and Medicare Tax on Wages, with your Form 1040 or 1040-SR. These wages must be included on Form 1040 or 1040-SR, line 1g. See Form 8919 for more information.

Restricted Property

In most cases, if you receive property for your services, you must include its FMV in your income in the year you receive the property. However, if you receive stock or other property that is nontransferable or subject to a substantial risk of forfeiture, you don’t include the value of the property in your income until it becomes substantially vested. (You can choose to include the value of the property in your income in the year it’s transferred to you, as discussed later, rather than the year it becomes substantially vested.)

Until the property becomes substantially vested, it’s owned by the person who makes the transfer to you, usually your employer. However, any income from the property, or the right to use the property, is included in your income as additional compensation in the year you receive the income or have the right to use the property.

When the property becomes substantially vested, you must include its FMV, minus any amount you paid for it, in your income for that year. Your holding period for this property begins when the property becomes substantially vested.

Example 12.

Your employer, the Holly Corporation, sells you 100 shares of its stock at $10 a share. At the time of the sale, the FMV of the stock is $100 a share. Under the terms of the sale, the stock is under a substantial risk of forfeiture (you may have to return it to your employer) for a 5-year period. Your stock isn’t substantially vested when it’s transferred, so you don’t include any amount in your income in the year you buy it. At the end of the 5-year period, the FMV of the stock is $200 a share. You must include $19,000 in your income [100 shares × ($200 FMV − $10 you paid)]. Dividends paid by the Holly Corporation on your 100 shares of stock are taxable to you as additional compensation during the period the stock can be forfeited.

Substantially vested.

Property is substantially vested when:

• It’s transferable, or

• It isn’t subject to a substantial risk of forfeiture (you no longer may be required to return it).

Transferable property.

Property is transferable if you can sell, assign, or pledge your interest in the property to any person (other than the transferor), and if the person receiving your interest in the property isn’t required to give up the property, or its value, if the substantial risk of forfeiture occurs.

Substantial risk of forfeiture.

Generally, a substantial risk of forfeiture exists only if rights in property that are transferred are conditioned, directly or indirectly, on the future performance (or refraining from performance) of substantial services by any person, or on the occurrence of a condition related to a purpose of the transfer if the possibility of forfeiture is substantial.

Example 13.

The Redwood Corporation sells to you as compensation for services 100 shares of its corporate stock for $100 a share. Under the terms of the transfer, you must resell the stock to the corporation at $100 a share if you leave your job for any reason within 3 years from the date of transfer. You must perform substantial services over a period of time, and you must resell the stock to the corporation at $100 a share (regardless of its value) if you don’t perform the services; so, your rights to the stock are subject to a substantial risk of forfeiture.

Choosing to include in income for year of transfer.

You can choose to include the value of restricted property at the time of transfer (minus any amount you paid for the property) in your income for the year it’s transferred. If you make this choice, the substantial vesting rules don’t apply and, generally, any later appreciation in value isn’t included in your compensation when the property becomes substantially vested. Your basis for figuring gain or loss when you sell the property is the amount you paid for it plus the amount you included in income as compensation.

Caution:

If you make this choice, you can’t revoke it without the consent of the IRS. Consent will be given only if you were under a mistake of fact as to the underlying transaction.

If you forfeit the property after you have included its value in income, your loss is the amount you paid for the property minus any amount you realized on the forfeiture.

Caution:

You can’t make this choice for a statutory or nonstatutory stock option.

How to make the choice.

You can make the choice by filing a written statement or Form 15620, with the Internal Revenue Service Center where you file your return. You must file this statement no later than 30 days after the date the property was transferred. Mail your statement to the address listed for your state under “Are requesting a refund or are not enclosing a check or money order...” given in Where Do You File? in the Instructions for Form 1040. You must give a copy of this statement to the person for whom you performed the services and, if someone other than you received the property, to that person.

You must sign the statement and indicate on it that you’re making the choice under section 83(b) of the Internal Revenue Code. The statement must contain all of the following information.

• Your name, address, and TIN.

• A description of each property for which you’re making the choice.

• The date or dates on which the property was transferred and the tax year for which you’re making the choice.

• The nature of any restrictions on the property.

• The FMV at the time of transfer (ignoring restrictions except those that will never lapse) of each property for which you’re making the choice.

• Any amount that you paid for the property.

• A statement that you have provided copies to the appropriate persons.

Caution:

You can’t make this choice for a nonstatutory stock option.

Dividends received on restricted stock.

Dividends you receive on restricted stock are treated as compensation and not as dividend income. Your employer should include these payments on your Form W-2. If they are also reported on a Form 1099-DIV, you should list them on Schedule B (Form 1040), with a statement that you have included them as wages. Don’t include them in the total dividends received.

Stock you chose to include in your income.

Dividends you receive on restricted stock you chose to include in your income in the year transferred are treated the same as any other dividends. You should receive a Form 1099-DIV showing these dividends. Don’t include the dividends in your wages on your return. Report them as dividends.

Sale of property not substantially vested.

These rules apply to the sale or other disposition of property that you didn’t choose to include in your income in the year transferred and that isn’t substantially vested.

If you sell or otherwise dispose of the property in an arm’s-length transaction, include in your income as compensation for the year of sale the amount realized minus the amount you paid for the property. If you exchange the property in an arm’s-length transaction for other property that isn’t substantially vested, treat the new property as if it were substituted for the exchanged property.

The sale or other disposition of a nonstatutory stock option to a related person isn’t considered an arm’s-length transaction. See Regulations section 1.83-7 for the definition of a “related person.”

If you sell the property in a transaction that isn’t at arm’s length, include in your income as compensation for the year of sale the total of any money you received and the FMV of any substantially vested property you received on the sale. In addition, you’ll have to report income when the original property becomes substantially vested, as if you still held it. Report as compensation its FMV minus the total of the amount you paid for the property and the amount included in your income from the earlier sale.

Example 14.

In 2022, you paid your employer $50 for a share of stock that had an FMV of $100 and was subject to forfeiture until 2025. In 2024, you sold the stock to your spouse for $10 in a transaction not at arm’s length. You had compensation of $10 from this transaction. In 2025, when the stock had an FMV of $120, it became substantially vested. For 2024, you must report additional compensation of $60, figured as follows.

Inherited property not substantially vested.

If you inherit property not substantially vested at the time of the decedent’s death, any income you receive from the property is considered income in respect of a decedent and is taxed according to the rules for restricted property received for services. For information about income in respect of a decedent, see Pub. 559.

Using the guidance

Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.

Sources and further reading

• Publication 525 (2025), Taxable and Nontaxable Income: Employee Compensation — Restricted Property — Internal Revenue Service; 2025 edition.

The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.