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.|
|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.