RSU Sell To Cover Deconstructed

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 may have to report sales of stocks on Form 1040 Schedule D. There can be a few variations here.

3a. The company does not use a broker. Instead of giving you 100 shares, they just gave you 60 shares. This is called “net issuance.” You don’t have to report anything on your Schedule D.

3b. The company uses a broker. The shares are sold after vesting. The sale price may be different from the price at vesting. 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 it just issues fewer shares to you (“net issuance”), you don’t have to report the shares sold for withholding. Otherwise you 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.

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Comments

  1. Mike says

    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. Harry Sit says

    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 says

    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 says

    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. Harry Sit says

    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 says

    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 says

    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. Harry Sit says

    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 says

    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. Courtney says

    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.

  11. Courtney says

    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!!!

  12. Harry Sit says

    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.

  13. PT says

    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

  14. Curtis says

    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.

  15. Harry Sit says

    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.

  16. Marie says

    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.

  17. Harry Sit says

    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.

  18. Nate says

    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.

  19. Harry Sit says

    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.

  20. Andrew says

    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.

  21. Harry Sit says

    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.

  22. SL says

    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!

  23. Harry Sit says

    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.

  24. Lalito says

    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?

  25. Harry Sit says

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

  26. KF says

    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!

  27. Harry Sit says

    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.

  28. tlc says

    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?

  29. tlc says

    (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

  30. Kavita says

    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

  31. dal says

    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?

  32. Harry Sit says

    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.

  33. robert groden says

    Please provide IRS publication number that documents sell to cover rule. A financial planner is telling me that I must pay regular income tax on the entire vested amount.

    thank you.

  34. Gia says

    500 RSU were origionally awarded 11/18/03, Lapse Date 12/01/07. 148 units were held for tax.

    This year, we made two trades out of the remaining balance. My 1099b states for RSU sold Date Acquired cover of Short 10/16/08 for both the 2009 sales/trades.

    Is the vested/released (suppose to mean same thing) the same as lapse date? or is the acquired cover of short 10/16/08 the vested/released date…in turbo tax, which date would I use as the vested/release date? In any event, what does Acquired cover of short date and lapse date refer to. Dont get the difference in their meaning to know which date to give…

  35. Harry Sit says

    Gia – What happened on 10/16/08? I would think the broker wouldn’t just throw a random date on the 1099 but you never know. Ask the broker why it showed 10/16/08 as the date acquired. Were those shares transferred to this broker from a different place?

    Yes, the vested date is the same as the lapse date. Lapse means the restriction (the R in RSU) is removed and you are vested with the shares.

  36. todd says

    thanks for your discussion on RSU’s… I have a question re: taxes and RSU’s..

    I sold quite a few RSU’s this year (09), – 10 separate lots – all of which were taxed at the time of vesting. Half of these lots vested in 2008, half in 2009, but I sold them all in 2009. Am I right in assuming that my W-2 for 2009 only included the income from shares that vested and were sold in 2009? What about the shares that vested in 2008 but were sold in 2009, including one that is being reported as a long-term gain (all the others were short-term)?

    Thanks

  37. John says

    Thank you for an excellent discussion on RSUs and TurboTax instructions.

    I have restricted stock units which vested and I sold in 2009. The “Confirmation of Release” that I received from my company includes a line for a small amount (about $7) of “Cash-in-lieu” as part of the “Calculation of Gain”.

    When performing the error check on TurboTax Premier, this small amount appears as a negative number on the “Summary of Compensation from Employee Stock Transactions” form Part II. column (g) which shows the difference of the TurboTax calculation and the amount shown on my W-2.

    My question is – is there a way to properly include the “Cash-in-lieu” amount when completing TurboTax so that there is no error in the program’s error analysis?

  38. Yo says

    Question: On 3/13/2009, 396 shares vested at a market value of $5.46 per share. 130 shares were deducted to cover taxes which left 266 shares. I sold 266 shares on 3/13/2009 @ 5.29 per share.

    To determine my loss, shouldn’t I use the orignal number of shares (396) times the fair market value at vest ($5.46) plus what I paid for the shares (.01) as my cost basis for the sale of the 266 shares ?

    396*$5.46 =$2162.16 minus $3.96 =$2,158.20 (- shouldn’t this be my cost basis to calculate the loss from my sell of 255 shares @5.29?

    Any help is greatly appreciated. Thanks!

  39. Nirav says

    I have the same question as Yo’s comment number 44 above. Can you shed some light? Turbotax seems to only calculate the cost basis from the shares I actually received from the RSU not the total including the ones held for tax withholding.

  40. Coco says

    Thank you for your extreme helpfulness! I hope you are still posting?!

    My facts (using easy figures):

    In 2008 my RSU total grant of 500 RSUs vested. My employer withheld 100 shares and distributed 400 shares to me. Price per share was $1. The relevant 2008 paystub shows $500 added into YTD earnings, and in a section called “After-tax Deductions” there is an entry called “Restricted Stock offset” and the amount in there is close to, but a little over $400 — in other words, the offset approximates, within a few dollars, the FMV at distribution of the shares ACTUALLY distributed to me.

    On my 2008 W2, the whole $500 was included in box 1 wages, and the offset was definitely NOT subtracted from the box 1 wages. (There is a separate little informational part to the W2 which summarizes YTD deductions and the ~$400 offset figure appears in there again.)

    My question: WHAT the heck is this offset about? Is the employer’s way of giving me credit for the 100 shares it withheld? If this offset relates to the 100 shares that were withheld, shouldn’t the offset be $100 not ~$400? I didn’t have any change in my paycheck during this pay period — both the RSU amount put into earnings and this after-tax deduction for the RS offset appear only in the YTD column on the relevant paystub, not in current earnings, so neither one affected my paycheck + or -.

    In 2009 I sold the 400 shares I got for a slight short-term capital loss. Now I am wondering whether my basis is $500 (because $500 went into my 2008 box 1 wages) or only $400 (because 100 shares worth $100 were withheld). I sense from reading all of your posts and the Q&As that it should be only $400. But this offset makes me wonder if my employer has pioneered some other way of dealing with the taxes. Can it be that instead of a sell-to-cover, the employer substituted this offset thing?

    (If the company did sell-to-cover, it did not get reported to me (they didn’t sell through a broker). My CPA did not make a $0 entry on my 2008 schedule D for the 100 shares withheld by my employer.)

    I will be so grateful for any answer, even short. But please say why the offset is ~$400 and not the $100 if you can think of why. Thank you so much.

  41. Harry Sit says

    Coco – The $400 is the value of the shares you received after taxes were paid. Imagine you have a secret paycheck. There is a $500 gross income and $100 tax withholding. Normally you would receive $400 cash. But you didn’t get any cash. You got shares. In order to balance that secret paycheck, the company made an entry for an after-tax deduction, representing taking $400 from that secret paycheck to buy the shares the company gave you. Your basis in the remaining shares is $400.

    If your company didn’t sell through a broker, not making a $0 entry is not a big deal.

  42. Coco says

    Thank you so much for your lightning fast reply!

    Your secret paycheck analogy is great, and finally makes the after-tax deduction offset make sense to me.

    I find it strange that the offset was not exactly the same $ amount as the FMV of the 400 shares I actually received. It seems odd for my employer (a huge company) not to nail the math. Perhaps they are carrying to only 2 decimal places when calculating my RSU earnings, but carrying to more than 2 when calculating the offset (giving me a slightly bigger offset deduction than the reported RSU earnings). I appreciate the extra few $, but it makes for a very confusing paystub to decipher.

    Thanks again!

  43. Kevin says

    Hi! Can you help me with this example.

    Lot 1. 100 shares vested on 1/10/2009. I paid cash to cover the tax of these shares so 100 shares are in my brokerage account.

    Lot 2. 100 shares vested on 6/10/2009. 40 shares were sold to cover taxes and 60 were added to my brokerage account for a total of 160 shares in my account.

    Assuming I use FIFO for reporting all my other stocks not from my employer… To report the sale on 6/10 which lot do I report these 40 shares are from. (ie. were these 40 shares acquired on 1/10 or 6/10)?

  44. ean says

    I’ve read (and re-re-read) all this great info but I still can’t decide if my quarterly vesting RSUs are a WASH sale due to 6 month ESPP purchases. I always get a small loss on each sell-to-cover (due to etrade $19.95 commission) and I’ve been reporting the losses the last few tax years. I also buy ESPP every 6 months so I guess that half of my RSU vests should be a WASH. (ARGH why does this have to be so tricky!)

  45. Harry Sit says

    ean – See comments #9 and #10 and especially the link in #10 about wash sale. Wash sale covers the day of sale and 30 days before and 30 days after. Did you buy ESPP shares in that timeframe? Salary deductions don’t count as share purchase. Only the actual purchase at the end of the six-month ESPP purchase period counts as purchase.

    If the sale does fall within 30 days of purchase, I would be conservative and count it as wash sale. You don’t lose your loss in a wash sale. You just postpone it to the ESPP shares.

  46. Naveen says

    Hi,

    I had some of my RSUs vest last year. At the time of vesting, I paid the necessary taxes using money in my brokerage account (mistake, I am regretting now :). I was checking my W2 and I do not see the taxes that were taken out of my account included anywhere. Total value of the vested RSU’s, approximately $3000, are included as ordinary income in my W2. I checked all my paychecks since the vesting date and I do not see the extra taxes included in any of them.

    How do I include the taxes taken out of my account in my tax filing ?

  47. Rose says

    Thanks for continuing to post and help. When I use Turbo Tax Premiere to report restricted stock, in the end I have an error that my RS doesn’t match my W2 reporting. This seems to be because my W2 reports both “sell to cover” restricted stock and RS where the taxes were paid with cash, so there was no sale. From what I read in your posts, if there is no sale it is reported in your W2 and need not be reported elsewhere until it is sold. The error message is this: Employer Stock Compensation Income Wks: Part III Column (f)-1 ($10,000) should not exceed the total amount of 6,000. If I only sold $6000, but $10,000 of tax was reported, what I am I doing wrong?

  48. Harry Sit says

    Rose – Sorry I can’t provide free tech support for TurboTax. I said several times in the comments already — stay away from the confusing help provided by TurboTax. Go straight to spreadsheet-style entries.

  49. Rose says

    Thanks for writing back. You are the hero of the hour! Just to clarify… I only report any RS that was sold (even if just to cover tax) and the other vested RS doesn’t need to be reported until it is sold officially, even though it was already taxed and reported on my W2? This seems a situation of something that is so simple, it is confusing. (Tax Act seems to just take it as it is, but Turbo Tax has increased our refund by $1000, which seems directly related to the RS amount that was not sold but still reported. ???)

  50. Harry Sit says

    Rose – It is correct you only report on Schedule D when you sell the shares. You will have to print out the returns from the two software programs you are using and see where the difference comes from. Make sure you didn’t over-state your tax withholding. I’m guessing you gave the wrong answer to a question “was there tax withholding for this sale” in TurboTax.

  51. Mani says

    Excellent article. This one page cleared all my questions regarding RSUs and reporting the transactions. Thanks.

  52. Carlos says

    Hi, I’m a bit confused and hope someone can give me some help. After 1 year 25% of my total restricted stock ward vested and 197 shares were automatically exercised. I was given the option and opted to sell-to-cover. The company sold 77 shares leaving me with 120. I have not sold any more shares from this grant. I have since left the company and have been unable to get information from the plan administrator. I have a 1099-B from the broker (e-trade) that states there was gross income (less commissions and option premium) of $2,026.67, further details of the sale says that $2,016.02 for taxes was already withheld. In the end I got about $11 in net proceeds. My question is do I owe any more taxes?

  53. Lorna says

    I just wondered why you consider it necessary to file a Schedule D for the sell to cover stock sold at the time of vesting. These stock are sold by my company, and although I agree that they are sold on my behalf, I have never received a 1099-B form related to their sale, so why would I need to account for them in my return?

  54. Sonya Evanosky says

    I have a very similar situation as “Yo” who posted in February 2010. My RSU’s vested in March 2008 and I chose the sell to cover option. I kept the shares and then sold them in January 2009. At the time of the vesting, the RSUs were worth $16.75 per share and the taxes were taken out. However, by the time the shares were sold in January 2009, they had declined to $8.50 per share. Can I record a loss on this? If so, is this considered a short term capital loss or a long term capital loss?

    Thanks so much for your help!

  55. Curtis Gilker says

    Let’s use your example. My numbers are different, but that doesn’t matter.

    $5,000 bonus buys 100 shares at $50 a share, for a total of $5,000. The $5,000 is added to my monthly pay (and to my W-2 income).

    “The company sells some shares on your behalf. In our example, they sell 40 shares on your behalf, i.e. $2,000.”

    “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.”

    Here’s where it appears to go off-track for me. My company added the $2,000 from the share sale for tax withholding to my monthly pay as well (and to my W-2 income).

    After the year end, the W-2 I receive from my employer shows $67,000 of income (no the $65,000 in your example) and $10,000 in withholdings.

    This seems like a mistake to me. Am I missing something?

  56. Harry Sit says

    @Curtis – Please note the $5,000 in my example is the gross amount. It’s not just the value of the shares you are left with. It includes the $2,000 in taxes withheld. In a sense the $2,000 is also added to income because it’s part of $5,000 but it doesn’t make sense to count the taxes twice.

  57. Joe says

    I appreciate the help you are providing. My situation is somewhat similar to your example, with some differences. I have 4 separate share releases, each with own vesting date and closing price. However, ALL of my shares were sold at once and I have only 1 figure for the amount withheld for taxes. When I try to work it in TurboTax, it seems like I’m supposed to know the number of shares withheld for taxes for each of the 4 lots. Do I divide the figure I have among the lots, keeping the same ratio as number of shares in each?

    Many thanks!

  58. Chris Angeloro says

    I am trying to determine what is in my best interest when it comes to RSU’s and sell to cover. My employer awarded me a stock bonus and an automatic STC transaction happened leaving me less shares. If the stock price were to multiply by 10 in a year would I have been better off paying my own taxes up front and hold all the shares to sell at the high price and pay all the taxes at that time?

  59. Susie says

    Just wanted to say a hearty “Thank You!” for this site. I was having a late night panic because I have to complete my taxes tonight (financial aid deadline for grad school) and I didn’t understand the RSU information I have or how to enter it into TT. Your concise, clear explanations answered all my questions. And, entering the information correctly (instead of the mess I had before I read this) resulted in a couple of thousand dollar difference in my taxes in the good direction! Cost basis always messes me up, and I forgot to multiply it by the number of shares (oops).

    Point is: THANK YOU!! : )

  60. tea4two says

    Hi TFB,
    You use the same example in both this site and “Restricted Stock Units (RSU) Sales and Tax Reporting” that said the cost base for same day sale was $5000 and I thought this was amount written to Sch.D. Now I am not so sure because you say in this site the cost base is $3000 for the remaining shares. Is the cost base of $5000 just to calculate the tax withheld? and it is $3000 that is written to Sch.D?
    Thanks in advance.

  61. Harry Sit says

    @tea4two – It depends on which shares you are talking about. “Same Day Sale” in the previous article “Restricted Stock Units (RSU) Sales and Tax Reporting” means selling all shares. In that case the cost basis is $5,000. This article talks about “Sell to Cover” which means selling only enough shares to cover the withholding and keeping the rest. For the shares sold for tax withholding, the cost basis is $2,000; for the shares you keep, the cost basis is $3,000.

  62. mj says

    Please help -my situation is slightly different

    167 shares vested in 2010 @ $55/sh
    107 sh x $55 = $5,885 income shown on subsequent pay stub, but not identified specifically identified on 2010 W2, although W2 income increased accordingly, while 67 shares withheld for taxes

    Sold 107 a month later for $50/sh (for a $5/share loss)

    My question is – I’ve recorded the sale transaction (loss) on Schedule D, how do I show the vesting event – 67 shares on Schedule D, so I’m not taxed twice?

  63. patela6 says

    Hi TFB,

    I have a similar issue to others. I get an error during final review because my W2 number for RSU doesnt match the vested (and sold) shares. This is because there are vested and UNSOLD RSU’s that I have not included in my return.

    How do I rectify this?
    a. somehow include the vested, but unsold RSU’s in Turbotax? This increases my taxes!
    b. use the spreadsheet method of reporting in Turbotax? have they not addressed this yet?

    Thanks!

  64. Harry Sit says

    @patela6 – It sounds like TurboTax assumes you sold all vested shares if you use its friendly step-by-step help. So just use the spreadsheet method and don’t bother with the extra help it’s trying to give you which actually messes things up.

    My TurboTax Basic doesn’t have the extra help for RSUs. It handles the RSUs just fine. If someone gifts me a copy of TurboTax Premier, I will figure out how to please it in the step-by-step interview.

  65. Kevin says

    Hi TFB Great site.
    I have been following your articles since last year on RSU- decompiled…etc.
    Have you used TTAX2010 premier to enter the VESTED but unSOLD RSU stocks?
    My employer sells some RSU to cover for taxes. I sold some and held on to others. All RSU are accounted for in my W2 income.

    However TTAx2010 errors out during the final checks of T TAX 2010 returns – as my totals of RSU sold vs reported in W2 are not equal.

    Any suggestions how to input RSU received but not sold in T TAX 2010 premier?

    Thanks you.

  66. Kevin says

    Hi TFB;
    I just saw your previous comment to PatelA on April 5th I will try out the spreadsheet method ( vs EasyGuide) for RSU if I can find it in the TTAX2010 premier…. will update you in 24 hours. There are atleast a dozen other users who are facing similar issues for Vested but unsold RSU with TTAX2010 on thier Live Community knowledge base.
    KevinS

  67. Harry Sit says

    @Kevin – I played with TurboTax online. If you sold some and kept some, when it comes to the page where it asks you how much was included in the W-2, just type the same number TurboTax has. It’s asking with regard to those shares sold, how much income was included. Your answer: all of it. The additional income for the unsold shares is not related to the sale. Therefore don’t include it in your answer.

  68. KevinS says

    Hi TFB;
    I have tried your suggestion above i..e. only stating the RSUs SOLD I put the same number as TTax2010. In doing so the Taxes increases. Since the total W2 wages are higher – I have already paid tax through my employer”sell to cover’ option.
    In summary:
    On the worksheet: Part II column d on TTAX2010: If the computed amount is less than column f W2 total RSU wages then you get TTAX error during final check. – If you state only the RSU sold.
    On TAX2009 there was an option for adding RSU vesting only and I did not have the issue then; only in TTAX2010 they have made this change, hence this error.

    I can use HRBlock deluxe to do the same. is there a step by step instuctions you can provide for ISO/NQSO and RSU? Thanks.

  69. CelinaS says

    Another tricky RSU question.

    I was issued 1,063 shares in September 2010. My employer was supposed to do the “net of tax” and reduce my shares but they forgot to. As such I was issued all my shares. The total FMV of shares was included in my taxes. FMV was $6.85 at date of issuance.

    Subsequent to this, another set of RSUs vested in March 2011. My employer reduced my shares by the number of shares I owed previously for the September 2010 issuance for taxes plus the shares for taxes in in the current year. There was no brokage firm involved, and it was a net issuance. I was supposed to receive 3,187 shares but my shares were reduced to 1,928 (282 for first issuance, 977 for second). FMV was $11 at date of issuance.

    How do I determine my basis and are there any 2010 tax consequences for the employer error?

  70. Coco says

    Thank you again for this wonderful site and your time answering questions. I have been receiving RSUs for a few years and can now follow and understand them in the 3 places they appear on my paystub — in the earnings section, in the taxes section, and in the after-tax deductions section, where the RSU offset shows up.

    This month, for the first time, I noticed something called an “RSU refund” in the after-tax deductions section of my paystub. This refund figure is a negative number (unlike the RSU offset figure, which is always a positive number). The other odd thing about this RSU refund line is that it has an entry in both the “current period” and the “YTD” column, whereas all my prior paystubs that show RSU activity have entries ONLY as YTD figures, never as a “current period” figure, whether in the earnings, taxes, or (for the offset) in the after-tax deductions section of the paystub.

    I do not find anything about “RSU refund” on your site or searching online generally. Can you tell me what this is? What does it mean in terms of tax treatment when (1) the RSUs vest and (2) I later sell the shares that actually come to me? (My employer does a sell-to-cover whenever RSUs vest, and I get a reduced number of shares from what the grant was.) Thank you so much.

  71. Ryan says

    Thank you, very informative… My example from last year, the treatment was called “Withhold to Cover”, my vesting amount was 19 shares, 8 shares were used to cover taxes, and it showed a “gain” of $0.57 with a final award of 11 shares. I assume this is the “Sell-to-Cover” and not “Net Issuance”? I can’t say I personally inputted that $0.57 gain anywhere on my taxes for 2011, if it wasn’t automatically on my W2.

    A question – does the share price used when the grant is first declared matter for taxes in any way (i.e. my # of shares for the 3 year vesting schedule is declared well before the first vesting, so they had to use some historical share price to set how many shares I would be receiving). It doesn’t seem to matter for anything other than that.

    Would love a link to tax treatment for Employee Stock Investment Programs that include discounted purchase if you have one! That is what gives me the worst headaches on taxes…

  72. Harry Sit says

    @Ryan – Did you receive a 1099-B for the 8 shares sold? If you did, you should account for it on your tax return. The IRS gets a copy of the 1099-B. If their computer doesn’t see it on your return, they will ask you about it. To your second question about the price at the time the RSUs were granted, you are correct — it doesn’t matter.

  73. Ryan says

    Thanks for replaying so quickly…I was overwhelmed by all the 1099-[insert letter here]s and by the pains of reconciling sales of discounted company stocks purchased in ~5 different lots and that went through a custodian change without the transactional records transferred…so I can’t say for sure! But I do not see one that seems to reflect the share amount or date of the grant.

    The “Restricted Award Transaction Advice” notice from the account servicer lists the line-items as “Shares Withheld for Taxes”, “Total Net Shares Issued”, and “Total Net Cash Proceeds”…maybe we use a the Net Issuance you described and not Sell-to-Cover? I’ve heard something about the company using stock they hold in our corporate treasury for purposes of meeting stock grants, so perhaps they are netting it out, transferring shares to me, and paying the tax portion with company cash? This stuff gives me headaches!

  74. Ryan says

    @TFB

    talked to our plan administrator and turns out it is indeed Net Issuance….my questions are now answered, thanks!

  75. scott says

    TFB, I cannot figure out my situation. For example, I have 100 RSU vested at $10.00 in 2009, the company withheld 40% ($400) as tax, on my w-2 of year 2009 I have $1000 as income and $400 as tax withhold. My RSU broker account still has 100 RSU shares. In 2011 I sold these 100 shares at $30, so how to calculate my gain and tax? My think it is ($30-$10)*200=$2000. This $2000 should be my long term gain and the tax should base on this $2000. Am I right?

  76. Ben says

    TFB, Your comments are greatly appreciated. I want to make sure I’ve followed the threads above correctly.

    (1) If I get say 1000 RSUs this year @ $10 and the company witholds 100shares for tax, 900 are deposited in my account. The totals show as $10K Income and $1K tax already on my W2. If I do not sell any there is nothing for me to do. Correct?

    (2) If I sell 100 shares in the same year at say $11. Then I need to understand the cost basis. which is 100*$10 or $1K so I will realize a gain of ($11-10)*100=$100. TT asks how many were granted, If you put in the original 1K RSUs looks like you will be double taxed. If instead if you put in (in this case) 200 RSUs noting 100 were for taxes it leaves the 100 shares to be used as the cost basis. Is this line of thinking correct?

    (3) If you sell additional 150 shares in a following tax year at $12, then in this case you don’t have to put in the number of shares sold to cover taxes since they were paid the previous year. In this case I would enter 150 shares with zero entered to cover taxes, using the sale of $12 plus the date of vest from the previous year with the original $10 price paid to calculate cost basis. Is this last one correct?

    Thanks in advance for your response

  77. Harry Sit says

    Ben – As I wrote several times in these comments already, use “Enter on a Spreadsheet” in TurboTax, not the EasyGuide. Try it. It’s much easier.

  78. Meg says

    Hi TBF,

    I am getting confused in TurboTax. I have RSUs that vested in 2 lots. The first lot I got 83 shares and sold 36 to cover tax, and in lot 2 I got 20 shares and sold 9 to cover tax. I reported both of the sell to cover transactions as Investment Sales in TurboTax. I entered the sales in manually and chose “RSU” as the type of investment. Then, I was asked to specify which vest lot I sold the shares from. For example, in the instance where I sold 36 shares, I had to say that I sold the shares from the vest lot where I got 83 shares; but it’s the same lot that I’m reporting the taxes sold on! Is that the right way to do it? I also enter new lot information for every single RSU Investment Sale that I create in TurboTax.

    Is entering Investment Sales in TurboTax equivalent to filling out a Schedule D? Do I need to report the total number of shares I was granted anywhere besides in the “vest lot information” section for a specific Investment Sale?

    After I enter all my investment sales, TurboTax shows me the “Your Employee Stock Plan Results” page and shows me an amount calculated which is 3x the amount listed in box 14 of my W2. How is it calculating this amount? What have I done wrong?

  79. Harry Sit says

    Meg – Sorry, I don’t know what’s going on with TurboTax. Not in a mood to work as free tech support for them.

  80. Christine says

    Just wondering if you would mind clarifying this for me…
    Say I had 10 shares of stock vest this year and 5 were sold to cover taxes. I have not sold the remaining five shares. On Etrade it says the cost-basis is 23.81. When I put info into Turbotax for cost-basis do I use 23.81*5 for the 5 shares sold, or the total 10 shares I received?

  81. Jaxen says

    I have a bit of an unusual situation. My RSU’s were released to me on 12/31/12. It is a sell to cover transaction with my broker. Apparently the actual sale date was a few days later which makes it fall under 2013. The RSU’s were accounted for in my W-2 but since it wasn’t sold until 2013, it does not show up in my 1099-B. How should I handle this?

  82. Jaxen says

    Hi Harry,

    Thanks for your reply. However, if I was granted RSU’s on 12/31/12 and the sell to cover did not happen until a few days later in 2013, does that mean I need to pay the taxes on the RSU’s in cash for 2012? The income shows up on my W-2 and the sell to cover would not apply for my 2012 income?

  83. Harry says

    Check the tax withholding on your paystubs and W-2. Your employer probably already booked the tax withholding in 2012. If not, you will have to pay cash in 2012 but you will get a credit in 2013.

  84. Esther says

    Love the breakdown of this. My only dilemma is..
    The total dollar amount from the # of shares sold (for sell to cover) is slightly more than the actual taxes need for the shares vested. I end up with $18+ because the amount from the shares sold wasn’t the exact amount needed to cover taxes, slightly more. Where and how do I report this gain.

    Other tricky part is although ti shows as a net gain in my stock transaction on etrade, my cost basis for the RSU vesting was more than the price at which the stocks were sold for sell to cover which would mean I would report a loss.

    not usre where the positve $18 comes into play. :(

    • Harry says

      You don’t do anything about the $18. Do it as if you bought the shares at the vesting price and sold at a loss. That’s it.

  85. srini says

    pretty good article and nice follow up questions by various readers. Thanks for all the info. I found it very useful to do my tax returns.

    Thanks
    Srini

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