Stock Appreciation Rights (SARs)

February 7, 2024 Chris Kawashima Beginner
Learn about stock appreciation rights (SARs), including how they work, how to participate, and how they may impact your taxes.

Stock appreciation rights (SARs) are a form of equity compensation tied to your company's stock performance over a specific period. If the stock's value climbs during that preset time, you receive a portion of the increase in either cash or stock. A primary benefit of SARs is that they allow you to profit from an increase in share price without having to buy stock.

We'll cover:

  • How SARs work 
  • How SARs are taxed 
  • Cost basis and tax forms 
  • Common questions about SARs

How SARs work

Your employer will issue a grant detailing the specifics of your stock appreciation rights. The grant includes a grant date, grant price, vesting dates, and expiration date.

  • Grant date is when your employer issues you the grant. It also typically determines the market price of the award and sets the start of the vesting schedule.
  • Grant price (also known as the exercise price) typically is the market price of the stock at the grant date and is the baseline to gauge how well the stock is performing. The value of your award is based on the excess value above the grant price.
  • Vesting date is the first day when you own the award outright—either as a cash payment or as a stock award, depending on the rules of your program.
  • Exercise period is the amount of time you have to claim the value of the SARs.
  • Expiration date is the last day you can exercise your SARs.

How SARs are taxed

You aren't taxed on SARs until you exercise the value in cash or stock. Then it is taxed as ordinary income. If you receive stock after the exercise, you also will pay tax on any additional gains at the time of selling the stock.

Taxes on SARs compensation

In most cases, your employer will withhold income taxes on your SARs compensation. Your employer will either hold back cash or stocks depending on the rules of your company's plan.

Taxes on stock sale

If you receive stock as SARs compensation and sell them later, you may incur a capital gain or loss depending on whether the stock value increased or decreased. If the sale price of your exercised stock exceeds your cost basis, you will be subject to capital gains tax.

If you sell shares within one year of claiming your SARs compensation, they will be subject to short-term capital gains and taxed at your income tax rate. You'll be subject to long-term capital gains if you sell after a year, and you'll be taxed at a lower rate.

Note: This section refers to U.S. taxation. International tax filers may have different obligations. Be sure to meet with a tax professional to discuss your specific situation.

Cost basis and tax forms

When filing your taxes, it's important to be mindful of the cost basis you report. Cost basis is the fair market value your company assigned to the shares at vesting. Using the correct cost basis helps ensure that you file correctly and aren't taxed more than the required amount. Refer to this cost basis sheet to help you determine the cost basis on your stock plan transactions so you can file your taxes accurately.

Those who sold shares will receive IRS Form 1099-B.  Those who purchased shares will also receive the IRS Form 8949 from their employer.

Common questions about SARs

What happens if my company's stock is performing under the exercise price?

SARs compensation is subject to market fluctuations. You aren't able to exercise while the stock price is below its grant price. In this case, the SARs are considered "underwater," which means the current market value is less than the grant price and your SARs have no value.

How do SARs differ from stock options?

SARs and stock options are similar. Each gives you an opportunity to share in your company's financial success. However, there is one key difference. Unlike stock options, when you exercise your SARs, you don't have to pay for the original value of the award.

What happens to my SARs if I leave my company or retire?

Typically, leaving your company will trigger an acceleration of the SARs expiration, giving you a tighter timeline to exercise your award. Check your award grant with your employer.

Can I choose whether I get cash or stock?

Your employer's SARs plan dictates how you will be compensated. Check the plan rules to determine whether you will get cash, stocks, or a combination of the two.

How do I know when to exercise my SARs compensation?

You control the timing of exercising your SARs compensation. You can do it at any time during the exercise period. Remember, if your company's stock has dropped below the original grant price, you won't be able to claim the award because it has no value. 

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Investing involves risk, including loss of principal.

The information and content provided herein is general in nature and is for informational purposes only. It is not intended, and should not be construed, as a specific recommendation, individualized tax, legal, or investment advice. Tax laws are subject to change, either prospectively or retroactively. Where specific advice is necessary or appropriate, individuals should contact their own professional tax and investment advisors or other professionals (CPA, Financial Planner, Investment Manager) to help answer questions about specific situations or needs prior to taking any action based upon this information.

Supporting documentation for any claims or statistical information is available upon request.

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