RSU Sell To Cover Deconstructed

April 9, 2008 by TFB

Ever since I wrote Restricted Stock Units (RSU) Sales and Tax Reporting, I received many questions. They all relate to sell-to-cover, which is the default, and often the only option people have for their restricted stock units (RSU). I must have not been crystal clear in my previous post. Otherwise I would not have received so many questions. I thought of a better way to explain it. So hopefully it is clear this time. For background on RSUs and tax withholding, please also read my previous post Restricted Stock Units (RSU) Tax Withholding Choices.

Let's use this hypothetical example.

100 RSUs vested on 4/20/2007. The closing price on the vesting date is $50 per share. The company sold 40 shares for taxes. You received 60 shares. Without the RSUs, your W-2 income for the year would've been $60,000, with $8,000 withheld for various taxes (federal, state, social security, medicare).

This transaction can be deconstructed into 5 steps as follows.

1. The company gives you a cash bonus. In our example, the bonus is $5,000, which is the closing price on the vesting date ($50) times the number of RSUs vested (100). The company adds this cash bonus to your W-2. If your W-2 income without the RSUs is $60,000, your W-2 income with RSUs now becomes $65,000. After the end of the year, they will issue you a W-2 showing $65,000 in box 1.

2. You use the cash bonus to buy shares. $5,000 bonus buys 100 shares at $50 a share. Buying shares by itself does not trigger any taxes. Your cost basis in these 100 shares is $50 a share, for a total of $5,000.

3. The company sells some shares on your behalf. In our example, they sell 40 shares on your behalf. You must report sales of stocks on Form 1040 Schedule D. There can be a few variations here.

3a. The company does not use a broker. The shares are sold on the vesting date at the same closing price. You report on your Schedule D:

Description 40 Shares XYZ Corp.
Date Acquired 4/20/2007
Date Sold 4/20/2007
Sales Price $2,000
Cost Basis $2,000
Gain or Loss $0

3b. The company uses a broker. The shares are sold on the next day after vesting at a different price. Suppose the sale price is $50.60 and the broker's commission is $20. The net proceeds of the sale is $50.60 * 40 – $20 = $2,004. You report on your Schedule D:

Description 40 Shares XYZ Corp.
Date Acquired 4/20/2007
Date Sold 4/21/2007
Sales Price $2,004
Cost Basis $2,000
Gain or Loss $4

If the shares are sold at a lower price, you show a loss instead of a gain. The loss can offset capital gains elsewhere. After that, it can offset up to $3,000 of your ordinary income. If you still have more losses, the remainder is carried over to the next year, offsetting any gains you have next year and up to $3,000 of your ordinary income again next year.

4. You hand over the money from the stock sale to your employer. Your employer remits the money to the federal and state tax authorities. They add the taxes paid to the withholding numbers on your W-2. If your tax withholdings without RSUs would've been $8,000, your tax withholdings with RSUs now become $10,000. After the year end, the W-2 you receive from your employer shows $65,000 of income (step 1) and $10,000 in withholdings.

5. Finally, your employer gives you the remaining shares. You bought 100 shares in step 2. They sold 40 shares on your behalf in step 3. You have 60 shares left.

Now, when you file your tax return,

  • Enter the income and taxes paid from your W-2 as-is. The RSU related income and tax withholdings are already included on your W-2. You don't have to do anything else with them. Do not add more income. Do not add more taxes paid.
  • Report the stock sale on Schedule D as shown in step 3. If the company does not use a broker and sells the shares at the same price as the closing price on the vesting date, you should have a zero gain/loss for that sale. Others might have a small gain or loss depending on the sale price and brokerage commission if any.

Your cost basis in the remaining shares stays at $50 a share. In our example it's $50 * 60 = $3,000 in total. Whenever you sell these shares, you have to remember this cost basis. If you sell them for more than $50 a share, you have a capital gain. If you sell them for less than $50 a share, you have a capital loss. You will report the gain or loss in the year you sell these remaining shares. The gain/loss will be a short-term gain/loss or a long-term gain/loss depending on your holding period after the vesting date.

I hope this post addresses all the questions. If you break up the RSU vesting and sale this way, it's not that complicated.

Related Posts:

Popularity: 33% [?]

Software picked, likely related posts:

Keywords: ,
Filed under: Taxes | Leave a comment

Comments

37 Comments on RSU Sell To Cover Deconstructed

  1. Mike on April 10, 2008 | permalink
    2.  

    Could you pls clarify: Cash Transfer scenario.

    1) Assume that No shares were ever sold.

    2) My employer did not include this RSU income nor taxes paid on the W-2 issued. Instead, they issued a separate statement of taxable income to show only RSU income total.

    How do you report the income and TAXES paid (Cash Transfer) in TaxCut or any of the usual tax software?

    Thx.

  2. TFB on April 10, 2008 | permalink
    3.  

    Mike – I'd challenge and double check the assumption that the income and taxes were not included on the W-2 issued. Check your paystubs before and after the RSU vesting date. Compare the difference in YTD total with the actual withholding taken from the paycheck. The employers are REQUIRED to include them on the W-2.

    In Cash Transfer, RSU vesting can be deconstructed in the same way as I outlined in this post, except in step 3, instead of selling shares, you give the employer cash and in step 5, you receive more shares. In effect, you are buying those additional shares from the employer at the closing price on the vesting date.

  3. Anonymous on April 10, 2008 | permalink
    4.  

    FYI: Name/URL doesn't seem to be working. When I try to "Publish a Comment" or "Preview" is just refreshes the "Leave your comment" screen with my unposted message over and over.

    Is it just me?

  4. KS on April 10, 2008 | permalink
    5.  

    Can you please clarify my situation:

    a. I have a RSU Sell to Cover scenario. The employer gave me approx. $10K worth of RSUs from which they sold approx. $4K worth for taxes. So I have around $6K worth of stocks in my account.

    b. From my regular paycheck, they took additional $4k worth of taxes.

    Now, isn't that double taxation? I have paid the $4K in taxes twice – once when the company sold the RSUs to cover and second, when they withheld taxes from my regular paycheck?

    I am a bit concerned because I have a huge jump in taxes owed compared to last year whereas the salary hasn't changed much.

    thanks.

  5. TFB on April 11, 2008 | permalink
    6.  

    Anon – re: Name/URL not working. Did you fill out the word verification? Sometimes that captcha thing times out and changes to different letters. Type the new set of letters and you should be good to go.

    KS – "b. From my regular paycheck, they took additional $4k worth of taxes." I doubt it. Did your take home pay go down by $4k on that paycheck compared to the previous or the next paycheck? If it didn't, they didn't really take it from your regular pay. More likely they reported $4k of withholding which is the shares they sold on your behalf. That's what happens in step 4 of this post.

  6. KS on April 11, 2008 | permalink
    7.  

    TFB – My mistake. The tax was accounted for. Just by coincidence, my 401K maxed out that same paycheck and taxes increased..

    Came across your blog yesterday doing taxes and searching for RSU. Love your posts. I will definitely be a regular!

  7. Dr. Kirk on April 12, 2008 | permalink
    8.  

    Here's the scenario I have …

    a) I have two (2) RSU grants that vested last November; one with 751 shares vesting, and the other with 26 shares vesting.

    b) From grant 1, 248 total shares were sold to cover taxes, and from grant 2, 9 total shares were sold to cover taxes

    c) This left me with 503 shares available from grant 1, and 17 available from grant 2

    d) I sold, in December, the 503 shares from grant 1; the 17 shares from grant 2 remain in my account.

    The taxes paid in item b above would be covered in my W-2, as you've covered in other posts, so I have that information.

    I'm doing my taxes in TurboTax now – this is the last piece I have to complete – and I'm wondering what needs to be done to document the taxes for the 17 shares that I'm still holding, and if there's anything additional that needs to be done for the 503 shares beyond the short-term capital gain already documented. Also … for the RSU entries in TurboTax … what does the Shares Withheld indicate … exercisable but unsold shares? The TurboTax folks were little help on this, and the help you've given others looks promising.

    Thanks in advance for whatever guidance you can provide.

  8. TFB on April 13, 2008 | permalink
    9.  

    Dr. Kirk – As I wrote toward the end of this post, you will report the gain or loss in the year you sell your remaining shares, in the same fashion as if you bought those shares with a cash bonus from your employer. For the 503 shares you sold in 2007, you report your gain/loss in 2007. For the 17 shares you are still holding, you report whenever you sell them. As for the TurboTax fields, I can't help you there because my Deluxe version doesn't have them. I think the extra guidance in TurboTax Premier confuses more than it helps. You might find you are better off with the spreadsheet-style data entries.

  9. evan on April 13, 2008 | permalink
    10.  

    You stated in your original post that one can file a loss in a sell-to-cover scenario.

    But it seems to me a sell-to-cover at a loss should always be considered a wash sale. A wash sale is any acquisition within 30 days after *or before* the sale at a loss. Since you're holding on to part of the stock from the RSU grant, shouldn't that count as an acquisition?

    Say I got a grant of 100 shares at $50 and sold 30 of them for taxes, with a $20 brokerage fee. The way I'm looking at it, that's an acquisition of 30 shares at $50 (basis $1500), a sale of 30 shares for $1480, and an acquisition of 70 shares at $50 (basis $3500). I can't take a loss on the 30 shares because I also got 70 shares within the wash sale period. Instead my basis on the 70 shares becomes $3520.

    Or does it not work that way because the 100-share transaction is considered one indivisible unit?

    I'd appreciate hearing your take on this.

  10. TFB on April 13, 2008 | permalink
    11.  

    evan – It's actually an acquisition of 100 shares and a sale of 30 shares at a loss on the same day or the next day. Wash sale does not apply in that situation. See example 2 in Wash Sales and Replacement Stock on Fairmark.

  11. Courtney on April 13, 2008 | permalink
    12.  

    I am using Turbo Tax and having problems with the restricted stock. I had 1,718 shares vest this year. The award price was $0.0010 cents per share. the market value was $14.26 on the day they vested. I sold 726 on this day to cover taxes (~$10,354.27). At a later date I sold 555 shares at $16.5025 for personal use.

    In Turbo Tax, I am entering these two transactions as seperately and then inputing the same award lot for each sale. When Turbo Tax computes what my income from these shares on my W-2 is, it is comping up as exactly double. I am assuming that this is because Turbo Tax is double counting my lots, but don't know how to input it another way. Any help you can offer would be appreciated.

  12. TFB on April 13, 2008 | permalink
    13.  

    Courtney – I don't understand your question. See if these screenshots are helpful to you.

  13. Courtney on April 13, 2008 | permalink
    14.  

    Let me try to explain in detail. I had 1,718 restricted shares that vested this year on 2/1/07 ($14.26 per share). The price I paid for these shares was a$0.0010 per share (grand total $1.72). My total gain on this sale was $24,498.68 less the $1.72 I paid for a total gain of $24,496.96. I sold sold 726 shares a day later at a price of $14.29 in order to cover taxes (total amount paid was $10,354.27). Later, in May, I sold an additional 555 shares in order to pay some unexpected expenses (these were sold for 555*$16.5025 = $9,138.79).

    I am having trouble entering this into Turbo Tax because I don't know how to input the second transaction of the sale of 555 shares. Turbo Tax asks me to enter in the lot award info for this transaction. If I enter the original award of 1,718 (which I have already entered in for the first transaction) it double counts my award. If I leave it blank, it comes up with an error and says that I can't have sold 555 shares because there was no lot award. Is this a little clearer? I have been trying to figure this one item out for two weeks without any luck.

    Thanks!!!

  14. TFB on April 14, 2008 | permalink
    15.  

    Courtney – The extra "guidance" in TurboTax is confusing you. Forget about it. Choose "Spreadsheet-Style Entry" in Add Investment Sale (step 2 in the previous screenshots link) and enter as I outlined in this post. For the 2nd sale of 555 shares, your net proceeds are $9,138.79. Your cost basis is $14.26 * 555 = $7,914.30.

  15. PT on April 14, 2008 | permalink
    16.  

    I am trying to figure out the cost basis for some RSU's. Here is the breakdown.

    250 shares vested
    - 82 to cover taxes
    leaving me with 168 shares which I sold at $34.80/Share
    168 x $34.803 = $5847

    My W2 reads $9115 (which is the 250 shares x the vested share price of $36.46.

    What is my cost basis?

    Thanks
    Phil

  16. Curtis on June 2, 2008 | permalink
    17.  

    If a company withholds restricted stock to cover the the tax withholding amounts, must the company liquidate this restricted stock to generate cash to pay the taxing authorities, or can the company pay the taxes from its operating or other account, and then account for the restricted stock withholding as a stock repurchase such that the restricted stock goes back as treasury stock?

    Your article seems to suggest that the company will sell the stock on behalf of the employee to cover the applicable tax withholding implications, but does this "sell to cover" mean a sale to a third party?

    The reason I ask is because a bank who has a restricted stock plan cannot "repurchase" stock in the absence of regulatory approval.

  17. TFB on June 2, 2008 | permalink
    18.  

    Curtis – I have no idea what the company does after it withholds the shares from you. Whether it sells them to a 3rd party or it just sells them to itself so to speak, the IRS only accepts cash for taxes. Sorry I can't help you there because I don't work in corporate Treasury department.

  18. Marie on January 18, 2009 | permalink
    19.  

    I have restricted shares that vested in 2008. My W-2 includes the full value of the 450 shares x $16.19. The company kept 180 shares for taxes. I understand from your examples how to enter these on Schedule D, but my general question is my income shows the value of the full 450 shares, but how does the value of the taxes I already paid with the 180 shares show up? It's not on my W-2 that I paid those in taxes so to me it seems like I'm paying taxes twice. Please help simplify this.

  19. TFB on January 18, 2009 | permalink
    20.  

    Marie – Step 4 of this post said "They add the taxes paid to the withholding numbers on your W-2." You can verify the withholding numbers by comparing the pay stub for the pay period in which your RSUs vested with the pay stub for the previous or the following pay period.

  20. Nate on February 4, 2009 | permalink
    21.  

    I paid cash on the witholding tax due on my restricted stock. The stock was awarded on 12/31/08 and was NOT included in my W-2 (I compared pay stubs to the W-2 given, etc). Should I ask for a new W-2 from my employer? All I have now is the transaction detail from Computershares. I could certainly add the amounts to my W-2 (both income and witholding tax) and I would get to the correct number, but I fear this might lead to an audit being the information from the W-2 that the employer sends the government would be different from what I put in my taxes. For the record, I am using TurboTax.com to file. Thanks.

  21. TFB on February 5, 2009 | permalink
    22.  

    Nate – You have to be very careful when you look at your paystubs. It's not enough if you just looked at the year-to-date numbers on your last paystub of the year and compared that to your W-2. You have to find the paystub which covers the vesting date and compare the YTD numbers with the YTD numbers on the previous paystub. Here's how they showed up on mine (using fictitious numbers).

    Paystub before:

    gross income: YTD $4,000
    tax withheld: YTD $1,000

    Paystub after:

    gross income: current period $1,000 YTD $7,000
    tax withheld: current period $250 YTD $2,000

    For gross income, previous YTD $4,000 plus current period $1,000 should equal $5,000, but the new YTD is $7,000, which means a RSU income of $2,000 is added to the YTD number. The same for taxes withheld.

    If you double checked the numbers and you are sure the W-2 is wrong, ask for a corrected W-2 from your employer.

  22. Andrew on February 6, 2009 | permalink
    23.  

    Thank you for your website. It has been very helpful.

    Are RSUs considered replacement stocks for the "wash sale" rule?

    I bought 500 shares of my company stock (on my own) in December of 2007. I sold those 500 shares for a loss in January of 2008. Later that same month I was "vested" for the first time in a RSU grant where I got 141 shares of my company stock and 60 shares were sold to cover taxes. I netted 81 shares.

    If the RSU shares were considered replacement stock for the 500 shares, how do I adjust the cost basis for the 60 shares if my company already sold them and took out a flat 25% for taxes?

    Any help is appreciated.

  23. TFB on February 6, 2009 | permalink
    24.  

    Andrew – I'm not sure because I'm not a CPA. If I were in that situation I would be conservative and treat them as replacement shares in a wash sale. Let me put some hypothetical numbers.

    12/07 bought 500 shares @ $20
    1/4/08 sold 500 shares @ $15
    1/24/08 vested 141 shares @ $18 (treated as bought with cash bonus)
    1/24/08 sold 60 shares @ $18 (for tax withholding)
    1/24/08 left with 81 shares

    Applying the wash sale rules:
    1) 359 shares were not replaced. Loss = ($20 – $15) * 359 = $1,795
    2) 141 shares sold in a wash sale. No tax loss. Carry additional basis @ $5/share.
    3) vested (bought) 141 shares @ $18. Adjust basis to $23/share.
    4) sold 60 shares @ $18. Loss = ($23 – $18) * 60 = $300.
    5) kept 81 shares. Cost basis is $23/share. Calculate gain/loss from $23 when these are sold.

  24. SL on February 14, 2009 | permalink
    25.  

    TFB – thank you for your detailed explanation on how to properly report RSUs. A couple of questions…

    I had some RSUs vested last year, and the company sold shares to cover taxes (no choice). However, my W-2 shows the income generated by the vesting, but the tax withholding is not included. Yes, I combed through my paystubs to check carefully if the withholding is correct, but my W-2 shows only the withholding for my normal wages and bonus. So, the only way to solve this is to request a corrected W-2?

    Also, I believe the company sold shares without using the broker (there is no record of transaction on the broker side). So in that case, the capital gain of those shares is trivially $0, correct? Do I still need to report it separately in sch-D? Thanks in advance!

  25. TFB on February 14, 2009 | permalink
    26.  

    SL – If you read my reply to Nate above and you are sure your W-2 is wrong, contact your payroll department. For your second question, yes the gain is $0 but I'm still reporting the sale on Schedule D. It's just an extra line, which doesn't bother me at all.

  26. Lalito on February 23, 2009 | permalink
    27.  

    Should the value of the shares (from vesting) be also included in row 'Year-to- Date Regular Earnings' in the paystubs along with each row for withheld taxes?

  27. TFB on February 23, 2009 | permalink
    28.  

    Lalito – That's up to each employer. Paystubs are not official tax documents. Employers can do whatever they want on the paystubs.

  28. KF on February 25, 2009 | permalink
    29.  

    I left a similar question on the screen shot page you referenced above, but thought I would try here as well.

    Your webpage is the closest I have come to being able to solve the RSU mystery in my tax return using Turbo Tax Premiere. But I am unclear on one thing, in Step 5 you say income and tax withholdings are in the W-2. I found the income and tax withholdings from the Vesting in the W-2, but not from the sale of the RSU. Is that the same thing? The RSU's were sold in the same year they vested.

    Specifically, Turbotax is asking me if the RSU sale was included on the W-2. If I say No, it adds the RSU sale amount to wages/income (and my refund goes down). This doesn't seem right since the RSU was already added to income when it vested. Help please!

  29. TFB on February 26, 2009 | permalink
    30.  

    KF – The shares you sold were a subset of the vested RSUs. Read again the 2nd last paragraph starting with "Your cost basis in the remaining shares …" TurboTax questions are unnecessarily complicated and confusing. Use the Spreadsheet-Style Entry or answer Yes to that question.

  30. tlc on March 13, 2009 | permalink
    31.  

    My wife has 2 sets of quarterly RSU distributions from the same company. One is clearly sell-to-cover. There are two transactions on her statement for each (one for the tax portion) and they're covered on the 1099-B.

    The other set has no "sale". The Confirmation of Release lists, Award Shares Released, Shares Traded, and Shares Issued. The "Traded" shares cover the taxes. These "Trades" are not listed on the 1099-B.

    I don't understand the terminology, but it balances. The income is in the W-2. Taxes were withheld by keeping a fraction of the shares. Statements show that those taxes went to the feds. All without "sales".

    My problem is that Turbotax complains about the income I listed when filling out the sell-to-cover sales doesn't match the box 14 RESTK number. There are no "sales" in the 1099-B for those.

    Any ideas? Is there another place to list RSUs besides schedule D? They're already in the W-2 income. Is Turbotax stupidity or ours?

  31. tlc on March 13, 2009 | permalink
    32.  

    (continued)

    We've considered reporting the trades as schedule D sales. But we had the same situation last year and didn't have to do that. I don't know if Turbotax just got too smart for itself, or if there's somewhere else we need to enter those numbers.

    BTW, these are handled by the same brokerage firm. The distributions associated with one grant date are always "Trades". The others are always "Sales".

    THANKS
    tlc

  32. Charu on March 30, 2009 | permalink
    33.  

    This is very useful. Any idea what changes if the grant is a Restricted Stock Award instead of an RSU?

  33. Kavita on April 13, 2009 | permalink
    34.  

    hi,

    we had some of our RSUs vest last year (say 100 shares). the sell-to-cover order for this was however executed as 2 sales of say 38 and 2 shares each. how do we enter this on Turbo Tax. if we enter this as 38 on a grant of 100 and 2 on a grant of 100, Turbo Tax says there was a total grant of 200 shares that vested.

    thanks,
    kavita

  34. TFB on April 13, 2009 | permalink
    35.  

    Kavita – Try splitting up your grant, like 90/10.

  35. dal on April 14, 2009 | permalink
    36.  

    Great run down. One more twist, though. 100 shares vest at $5. The $500 income is included on the W-2. 75 shares available now, 25 used to pay taxes. For the 25, no 1099 is generated. They were not "sold" by the company or broker, it appears. The $125 for taxes was simply credited to me and also whos up on the W-2.
    If the sale of shares for taxes is not reflected in any 1099, is it still required to record it on a Schedule D?

  36. TFB on April 14, 2009 | permalink
    37.  

    dal – There are two schools of thought about the 25 shares and $125 in your example. (a) Do nothing. You got your bonus, paid your tax, used the rest of your bonus to buy 75 shares. (b) Add an entry in Schedule D showing zero gain. Sell 25 shares for $125 with a cost basis of $125. I wrote in this post last year how to do (b). I believe method (a) is fine as well.

  37. Shreyas on May 31, 2009 | permalink
    38.  

    very very useful…thanks!

Tell me what you're thinking...