Stock Appreciation Rights (SARs)

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

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.