Negative Income under Section 83 for Restricted Property?

[namealreadyinuse]

Can you have negative income under Section 83? If the value of the property when the restriction lapses is less than the amount paid for it, what happens? The regs provide that compensation equals the excess of FMV on vest over amoount paid. In our case, this number is a negative. Does it offset other W-2 wages or what???

[Guest Harry O]

The employee recognizes no income upon vesting since he paid more for the property than what it was worth at vesting. However, the employee's tax basis is equal to what he paid for the property. If he immediately sells the property he will be entitled to a capital loss equal to the difference between what he paid and the FMV at sale.

Example: Employee paid $5 for property subject to risk of forfeiture. At vesting the property is worth $3. The employee recognizes no compensation income and his tax basis in the property is $5. If he immediately sells the property for $3, he recognizes a $2 short-term capital loss. This loss can offset any capital gain income the employee has.

Conceptually this is the "negative income" you referred to but the employee only gets the tax "benefit" of the loss when the property is sold, not when it is vested.

[Guest mjb]

Sect 83 is an income tax provision that increases ordinary income by the amount of property transferred to an employee for the performance of services that exceeds the amount the employee paid from his own funds. If an employee pays 100 dollars for property worth $150 the employee has $50 of ordinary income. If the employee pays $100 for property having FMV of 90 the employee has 0 taxable income because the FMV is less that the amount paid. There is no ordinary loss because only losses incurred in a trade or business or proft making activity or casualty loss can be claimed against ordinary income by individual taxpayers. If the property purchased is a capital asset the employee can claim a capital loss upon sale of the property and apply the loss to reduce long term or short term capital gains (or against ordinary income up to 3k).