RSU stands for Restricted Stock Units. It's the new form of stock-based compensation that has gained popularity after the employers are required to expense employee stock options. The biggest difference between RSUs and employee stock options is that RSUs are taxed at the time of vesting while stock options are usually taxed at the time of option exercise. The employer is required to withhold taxes as soon as the RSUs become vested.
In a previous post, Restricted Stock Units (RSU) Tax Withholding Choices, I wrote about what I chose among the three tax withholding choices -- same day sale, sell to cover, and cash transfer -- and why. This time I'm writing about how to account for taxes on the tax return, especially if you use tax software like TurboTax or TaxCut.
I'm going to use this simple example:
Suppose you had 100 RSUs vested on October 31, 2007. The closing price of the stock on that day is $50, and the tax withholding rate is 40%.
Regardless of which choice you made for tax withholding -- some employers don't give you a choice and sell to cover is your only option -- your employer will include on your W-2 as wages the total value of the vested RSUs. In our example, it's $50 * 100 = $5,000. They will also withhold the same amount of taxes regardless of your choice. In this example it's $5,000 * 40% = $2,000. How you account for taxes on your tax return for the rest will depend on your tax withholding choice.
1. Same Day Sale. If you make this choice, you sell everything. Let's say on the day after the vesting date the shares are sold at $50.10 per share, less a $20 commission and $1 SEC fee. You total proceeds before tax withholding is $50.10 * 100 - $20 - $1 = $4,989. The employer withholds $2,000. You are left with $2,989. At tax time, you will receive a 1099-B from your broker listing the stock sale proceed of $4,989. You enter in TurboTax or TaxCut, or on Schedule D of Form 1040:
Description: 100 shares XYZ, Inc.
Net Proceeds: 4,989
Date of Sale: 11/01/2007
Cost Basis: 5,000
Date Acquired: 10/31/2007
Your cost basis is the amount your employer included on your W-2, which is the closing price on the vesting date times the number of shares vested. In this example, you will show a short-term loss of $11 on your tax return because of the brokerage commission and the SEC fee. The income and the associated tax withholdings are already included on your W-2. Use those numbers as-is.
2. Sell to Cover. [Update on April 9, 2008: I wrote a follow-up post RSU Sell To Cover Deconstructed to clarify this option. Jump ahead to that post if you'd like.] If you make this choice, or if you don't have a choice, your employer sells just enough shares to cover the tax withholding. Using the same numbers as in same day sale, they sell 41 shares. The SEC fee is a bit less, say $0.40. You receive from the sale $50.10 * 41 - $20 - $0.40 = $2,033.70. The employer takes away $2,000 for tax withholding. You are left with $33.70 in cash and the remaining 59 shares. At tax time, you will receive a 1099-B from your broker listing the stock sale proceed of $2,033.70. You enter in TurboTax, TaxCut, or on Schedule D of Form 1040:
Description: 41 shares XYZ, Inc.
Net Proceeds: 2,033.70
Date of Sale: 11/01/2007
Cost Basis: 2,050
Date Acquired: 10/31/2007
Once again, your cost basis for the shares you sold is the amount your employer included on your W-2 for those shares, which is the closing price on the vesting date times the number of shares you sold for tax withholding ($50 * 41 = $2,050). After the sale, you show a short-term loss of $2,050 - $2,033.70 = $16.30 because of the brokerage commission and the SEC fee. Again, the income and the associated tax withholdings are already included on your W-2, and you just use those numbers as-is.
For the remaining 59 shares, you keep a cost basis of $50 per share ($50 * 59 = $2,950). You have to remember this number until you sell the remaining shares. Whenever you sell them, you enter in TurboTax, TaxCut, or on Schedule D of Form 1040:
Description: 59 shares XYZ, Inc.
Net Proceeds: whatever you sell them for, copy from 1099-B
Date of Sale: your date of sale
Cost Basis: 2,950
Date Acquired: 10/31/2007
You will show a short-term or long-term gain or loss for these remaining shares depending on your date of sale and the sale price.
3. Cash Transfer. If you make this choice, you give your employer cash for the tax withholding and keep all the shares. You can sell the shares either immediately or keep them for however long you like. The tax accounting is the same as if you bought the shares at the closing price on the vesting date. Whenever you sell them, you enter in TurboTax, TaxCut, or on Schedule D of Form 1040:
Description: 100 shares XYZ, Inc.
Net Proceeds: whatever you sell them for, copy from 1099-B
Date of Sale: your date of sale
Cost Basis: 5,000
Date Acquired: 10/31/2007
You will show a short-term or long-term gain or loss for these shares depending on your date of sale and the sale price. The income from RSU vesting and the associated tax withholdings are already included on your W-2, and you just use those numbers as-is.
That's all. Hope this is helpful to someone looking for info on the tax treatment and implications of RSU sales.
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37 comments:
In sell to cover, do you not account for the other 59 shares which you've held on to? Being given only the sell to cover option, and quarterly vestings of RSUs in 2007, I vest four times during which stock is automatically sold to cover taxes. I sell the remaining shares from three of these four vests during 2007. 1099B lists these seven transactions. My W2 however, lists ALL the RSU vested value. Do I not worry about reporting on schedule D the vested value of the shares I'm still holding?
great question anonymous1- I didn't get a choice on how my rsu's were handled- the company sold enough on the day of vesting to cover the taxes they withheld. In one instance, I had roughly 152 shares vest, and 54 were sold immediately to cover the taxes. I'm pretty sure I'm in bucket b in the description above, but I'm interested to see the response to your q.
If you are holding on to the remaining shares (59 shares in my example), you don't account for them now. You account for them when you sell them, which can be the same year or many years later. At that time, you record your sales proceeds and a cost basis which equals to the value of those shares at the time of vesting. Basically you treat those shares as if you bought them at the price your company calculated on your W-2. That's why I said you must remember the value of those remaining shares at the time of vesting until you sell them.
hi
here is my problem. 100 RSU vested in april'07 for $20 and 39 RSUs were sold to cover the taxes @ $20 (total 39*20=780) on the same day as vesting. But, in my W2, i got a income for 100 RSUs (100*20=$2000). how do i report the 39 RSU's sold to cover for taxes?
For the 39 RSUs sold for tax withholding, on Schedule D:
4/xx/2008 sale 780 cost basis 780 gain/loss 0
Thanks for your helpful post on the proper tax treatment for RSUs. I have a question regarding restricted stock awards. In 2007, three relevant transactions occurred:
Jan07 - Some shares vest and a sale to cover occurs
Mar07 - Sale remaining shares from those that vested in Jan07
Dec07 - Additional shares vest and a sale to cover occurs
I received documentation for all three transactions, but I only received one 1099-B and it just covers the Mar07 transaction. Do I need to account for the Jan07 and Dec07 transactions on my tax forms? If so, should I have received a 1099-B for those or do I just use the documentation I received from the transaction - a "lapse confirmation" showing shares lapsed, shares sold to cover taxes, and net shares?
Thanks!
Matt - Same answer as I gave to Jagadeesh in the previous comment. Some employers don't use a broker for the sell-to-cover transactions and they don't show on 1099-B. In that case, you don't have a gain or loss on sell-to-cover. The sale proceeds equal exactly the tax withholding reported on your W-2.
Suppose 40 shares were sold to cover tax withholding of $1,000, I would still enter on Schedule D:
1/xx/2007 40 shares XYZ Corp. sale $1,000 cost basis $1,000 gain/loss $0
Make similar entries for the December sell-to-cover transaction.
Great info on RSU's! Current employer is a MasterLimitedPartnership (PTP) - so instead of company "stock", am dealing with receiving company "units". Do you know if these are handled & reported on income tax same as RSU?
Thanks - DB
Very helpful. I was lost in TurboTax until I read your post. Thanks so much.
Thanks very much for the details. In turbo tax I entered all my details. But when I click Done it takes me to Employee Stock Plan Result page and shows the following details in a table
Stock Plan, Amt we computed, Is it on w-2, Actual Amount on w2.
Here is an example:
No. of Stocks vested : 100
Price : $100
No. of Stocks sold to cover the tax : 40
The results shows in the above Turbo Tax page
Stock Plan : RSU
Amount we Computed : $4000
Is it on W2 : Yes
Actual Amount on W2: BLANK
What should be the value in the Actual Amount column 4000 or 10000. In W2 I have 10000 as my earning. if I enter 10000 then my return goes up by around 2000. Please let me know what should be the correct amount.
You must have a different version of TurboTax. My deluxe version doesn't have a table like that. Anyway, you should look at the Schedule D it produces for you. Put in a value, then open the Schedule D form. The schedule D should show $0 gain/loss for those 40 shares.
Just wanted to say thanks. Your write up was very helpful. Thanks again!
TFB, Nice Information. Very Useful. However in my case, my employer withheld stock to cover the taxes. Is that the same as sale to cover. The 1099 from the broker does not show the sale but the W2 has the taxable income from the vested RSU's. Should anything be listed on the my schedule D?
Example:
100 RSU Vested
30 withheld
70 RSU available to me.
@Anonymous - One more time, same as sell to cover, except no broker was involved and no 1099-B. Same answer as in comment to Jagadeesh and Matt.
Example:
100 RSU Vested
30 withheld
70 RSU available to you
Suppose the closing price on the date of vesting is $10 per share. Enter on Schedule D:
Description: 30 shares XYZ Corp.
Net Proceeds: 300
Date of Sale: xx/xx/xxxx (same as vesting date)
Cost Basis: 300
Date Acquired: xx/xx/xxxx (same as vesting date)
Gain/Loss: 0
Hello,
Thanks for the web site.
I need some help.
There were 4 times last year when
my shares vested (4 shares each time) and the company did a sell to cover each time.
I DID NOT sell any of these.
Now, I did purchase a few shares thru my company's ESPP program.
So, do I need to worry about wash sales due to the RSU sell to cover??
TurboTAX deluxe does not give me a screen for RSU sales. Does it go under Investement sales as a stock sale?
THANKS !!
corsica
ap - You only worry about wash sale when the sale resulted in a loss. If a broker isn't involved, the company's sell-to-cover usually creates neither a gain nor a loss. If you do have a loss from sell-to-cover, then you have to take into account the wash sale rules.
Thanks TBF. I think a loss is involved (but very small) as there was a broker fee of $5 per sale.
So, wash sales would apply, correct? I did have a purchase of ESPP during this time.
another question: Should I check the box where it says taxes were withheld on this sale?
In my case, the CO did a sell to cover and amount sold was reported in my W-2 under taxes withheld.
Finally, would this go under Investment sales in TurboTax?
Thank you!!
ap - If you think of the RSU sell-to-cover transaction as this series of transactions, it will become very clear:
- The company pays you a cash bonus (income on W2)
- You use the cash bonus to buy shares (cost basis in shares)
- You sell some shares (Schedule D gain/loss = sales proceeds minus cost basis minus brokerage fee if any)
- You turn over the sales proceeds to the company for tax withholding (tax withheld reported on W2)
So if you bought shares within the wash sale window after taking a small loss, if I were you I'd apply the wash sale rule, i.e. not take the loss on the sale, but increase the cost basis on the ESPP shares by $5.
'No' to the tax withheld checkbox and yes this goes under investment sales.
Here's a tricky one:
My employer only gives the option to sell to cover
The sell to cover happened the day after vesting and the share price had fallen significantly
My employer regular pay to make up the difference
My W-2 shows I've paid tax on the full value of the shares on the day they vested
I think I can report a capital loss for the sell to cover as it was a lower price than that reported on my W-2 and I made up the difference out of pay
But... my 1099 does not have an entry for the sell to cover - can I still report it on Schedule-D?
Maxwell - Whether you receive a 1099 or not, you still sold shares. If you sold for less than your cost basis, you had a loss. See my previous comment on how the sell-to-cover is deconstructed.
LM
I had 8000 RSU shares vest in small blocks between years 1998-2001. I've now sold 2000 shares, do I have to use FIFO methodology to report basis to IRS? Also, I've heard different advice regarding what stock price can be used for tax basis. Can one use EITHER the grant date price or vesting date price as tax basis?
Thank you!
LM - Your basis in each lot is the amount of income your employer included on your W-2. If they used price on the vesting date, you must also use that price. If they used price on the grant date (although I haven't heard of any such case), you must also use that price. Unless you specifically identified the lot(s) at the time you sold those shares, you must use FIFO. You can't arbitrarily select lots after the fact. See Identifying Shares You Sell on Fairmark.
Hello,
Here is a estimated tax question and not an RSU question :)
I've never had to pay estimated taxes thus far although I owed some taxes last year and a lot this year.
Now, TurboTax printed out quarterly estimated tax vouchers for me.
What is the recommended approach here? Should I pay them or just change withholdings?
THANKS!
Anon - Change withholdings. It's much easier. There is no quarterly deadline. You don't have to remember to mail in the check. You don't have to remember how much you paid. Your employer reports it for you on your W-2.
I had restricted stock units that vested in 2007. The month before vesting- I signed an agreement with my company that all shares would be sold upon vesting. The stock vested at $31 per share. The stock sold for $29. The $31 per share award is included on my w-2 as wages in box 1. I am using turbo tax to figure my 2007 taxes. The difference between the price awarded and received is about $10,000 loss. Since the captal gain it should offset is included on a W-2- Is there any way to recognize this loss in 2007? I would appreciate any advice or guidance. Thank you.
JackieB - It's just as if you employer gave you a cash bonus and you bought those shares at $31 and sold at $29. If you sold other investments which produced capital gains or if you received capital gains distribution from some mutual funds, the loss will offset those gains. After that, you can offset $3,000 of ordinary income. If you still have more loss, the loss is carried forward to the next tax year.
I made a post on my blog about how to handle RSU's in Turbo Tax Premier. Thanks for your tips that helped me get an understanding. link
Under the "Sell to Cover" option, I understand that you show the gain or loss on Schedule D (Capital gains), but what I need clarification on is the tax amount associated with the withholding shares. The company held for taxes 100 shares at a market value per share of $25.... so is that $2500 added to your Fed Income tax witheld or is it already in the W2?
thanks for the info on the sell to cover. I understand about reporting the sale on Schedule D. My question is about all the fed tax, fica medicare, fica social security, state tax on the RSA transaction advice. Does that add into what is on my W2? it did not look to me like that was included on my W2, based on reviewing my pay stubs for the sale time frame. for example, if the sale advice says fed tax paid is $100, and W2 says fed tax paid is $345, should tax paid on 1040 be $445? (seems like self-evident, but since I;ve typed it all now...)
The RSU related income and tax withholdings are already included in your W-2. Use the numbers from W-2 as-is.
Hi,
I did cash transfer for paying the tax (your option 3). How should the with holding be shown on W2 ?
The cost basis for RSUs was used to show the income correctly, but the taxes withheld does not include the tax money I paid in cash. W2 shows this under Year to date deductions as Restricted stock offset and last payslip 12/31/2007 includes this in after tax deductions. I am confused as to what to show in Schedule D and how to get the tax withheld included in filing for this year.
Any help would be great.
e.g:
No. of RSUs 150
Cost Basis $7.86
RS earnings : 1179
Restricted Stock offset is shown as 677.33 Th Cash transfer I did was actually $501.67 (42.55% tax)
Sridhar - You did cash transfer. No shares were sold. Therefore nothing to report on Schedule D for last year (unless you sold the shares later in the year). Use the W-2 numbers as-is. Both the 1,179 income and 501.67 taxes you paid are already included on your W-2.
My husband has RSU and on his statement of taxable income it list
10/28/07 vested 68 shares Value basis 13.57 , W-2 income 922.76.
He is in cover to sell so on 10/28/07 57 shares sold at 13.11 W-2 income is 773.49.
In turbo tax I enter in the 57 shares. It ask me for a value lot in which I enter the 68 shares at market price 13.57 vested on 10/28.
On the Statement of taxable income both the 922.76 and the 773.49 are listed as income but in turbo tax it list only th 773.49 as W-2 income.
Have I done something wrong.
Thanks for the detailed information. Does the RSU vesting schedule invalidate a loss (due to wash rules)? More specifically, say 100 shares vested on Jan 10 2007 as a part of a quarterly vesting schedule. So, 100 shares would vest on Apr 10 2007 as well. If I sell 100 shares vested from Jan 10, at a loss on Apr 3, Can I get the tax adjustment for the loss. Any ideas?
Thanks,
Mak
Mak - For the purpose of applying wash sale rules, treat RSU vesting as buying shares. In your example,
1/10/07 buy 100 shares
4/3/07 sell 100 shares at a loss
4/10/07 buy 100 shares
I would say the sale on 4/3/07 is a wash sale because you bought the same stock within 30 days after the sale. For more info on wash sale, see Wash Sales 101 on Fairmark.
Previous anon - Please read this post, the comments, and the follow-up post for sell to cover again. It's already been covered many times.
Would taxation and reporting of taxes be different if the company isn't public? What if I'm granted RSU's w/c are fully vested, do I need to pay income tax on this now? What would be my options for paying the taxes, since I can't sell because the company is not yet public?
Excellent article! I have a simple question from an employer’s side which I cannot find an answer for:
When restricted stock vests, should the taxable income (included in Box 1, 3, 5…) also be reported under ‘Box 12 Code V—Income from the exercise of nonstatutory stock option(s)?’ Or, are there no reporting requirements, allowing the employer to include it in Box 14 at their discretion?
Thanks for your help!
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