Ever since the companies are required to expense employee stock options, more companies started to grant the employees Restricted Stock Units (RSUs) instead of stock options. The first batch of RSUs I received will vest shortly. Unlike non-qualified stock options which are taxed at the time of option exercise, RSUs are taxed at the time of vesting. Our stock plan administrator has asked me to choose how I want to pay for the tax withholding when my RSUs vest. I have 3 choices:
1. Same Day Sale. This is the simplest. On the vesting date, I sell everything. After subtracting for tax withholding, I end up with net cash.
2. Sell to Cover. If I choose this option, they will sell just enough shares to cover the tax withholding. I keep the remaining shares and I can sell them myself whenever I want to.
3. Cash Transfer. For this option I will have to come up with cash myself to cover the tax. After that I have all the shares and I can sell them whenever I want to.
Which should I choose? Let’s use an example and see the math. Suppose I will have 100 shares vested; the price on the vesting date is $50; and the tax withholding is 40%.
1. Same Day Sale. I will have $50 * 100 * (1 – 40%) = $3,000.
2. Sell to Cover. I will have 100 * (1 – 40%) = 60 shares and no cash.
3. Cash Transfer. I will be out $50 * 100 * 40% = $2,000 cash but I will keep 100 shares.
Option (2) Sell to Cover is equivalent to doing Option (1) Same Day Sale and immediately buying 60 shares with cash on the open market.
Option (3) Cash Transfer is equivalent to doing Option (1) Same Day Sale and immediately adding $2,000 from my own pocket and then buying 100 shares.
If I find my employer’s stock attractive, I can buy it at any time for however many shares I want. I don’t have to buy it on the RSU vesting date or buy those exact number of shares. So there is no advantage whatsoever for them to do it for me. This is a no-brainer. I chose Same Day Sale.
- RSU Sell To Cover Deconstructed
- Restricted Stock Units (RSU) Sales and Tax Reporting
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Thanks for this post. My employer just switched to RSUs (away from NQOs), effective 1-1-2008. I got my first award this week, and was trying to make sense of it all.
Did you find out the commission to sell? Mine is a ridiculous minimum $50 charge or 6 cents/share. On a RSU vesting of $1000, this is a minimum 5% fee.
I chose to pay the tax and transfer the shares out to sell at WellsTrade (both free).
Harry Sit says
Fortunately the commission for me isn’t that bad. If I transfer the shares out, the market price fluctuation can easily eat up what I save on commission.
I’m more interested in this new accounting game corporations are playing. Is this latest maneuver another way for them to continue cooking the books and avoid counting the expense?
On your example of $50 x 100 shares with 40% tax withheld what is the AMT due?
Hi a small typo in the last sentence that confused me.
I chose Sale Day Sale.
Harry Sit says
Thank you. Should be Same Day Sale. Corrected.
I got 188 RSU vested last year. Employer sold 71 shares for tax withholding. I am left with 117 shares. Employer shoing 187*29.57=5999.99 income in W2 and tax withholding 71*29.57=2099.99.
I received my 1099 statement from broker. It doesn’t mention about 71 shares sold to cover tax on RSU. Do I need to show it in Schedule D ?
My company was bought by another comapny about 1 1/2 years ago. I was told that to exercise my Stock Options (which are now RSU’s) I have to pay my employer the share price * number of shares and then the company that hold s the options will then pay me the going share price.
So they say that I need to send them a check for about 33K and then in about 1 week to 10 days I will get paid 59K. So 59K – 33K = 26K (less with-holdings).
Is this correct?
Seems like one of those internet scams “You pay me 50 bucks and I will send you 100 bucks in return!”
But this is thru my company. Is this really how it is done?
Matt V says
You talk about the three methods in your article, but you don’t mention withhold to cover where you would withhold shares to cover taxes, effectively purchasing the shares of the company. This is how the majority of restricted stock/RSU vestings occur accross all industries. At vest, the employee is taxed on the FMV of the stock and this is taxable compensation in their W2. Employers are required to withhold taxes on these releases. The majority withold shares to cover taxes instead of fronting the tax money (against SOX compliance – officer loan) for the employee or having the employee cough up cash (easier for an executive to do). How would you account for this tax withholding or share repurchase? If you use the “cost method” for accounting for a real repurchase program would you use the same for repurchasing shares withheld for taxes, or would you record to APIC using the FMV that you withheld at? Maybe you could also explain cashflow statement presentation. A shares repurchase program would be considered a financing activity, but I woud think shares witheld for taxes would be an operating activity. Maybe you could expand??? Would be happy to hear a response. you can email me at [email protected].
Harry Sit says
Matt – This post was written from an employee’s perspective. I’m not too concerned about how an employer would account for the event on its books because an employer can afford professional advice. For an employee, “withhold to cover” is similar to #2 “sell to cover.”
I have to give some money to my parents and instead of a gift of cash, I am thinking out this-
1. Do a cash transfer to get all RSUs with 0 cost basis.
2. Gift the stocks to parent who will sell them (with 0 basis) and pay tax.
3. Given their tax bracet is much lower than mine, they pay a lot less than what I would have paid.
This will be under the 12k gift tax limit so I am guessing no gift tax involved.
What do you think?
Harry Sit says
anonymous – I’m sorry your plan won’t work. Cash transfer does not give you a zero basis. You are going to be taxed at the fair market value at the time of vesting. Your basis is also the fair market value at the time of vesting. After you acquire the shares, you can gift the shares to them. They get your basis. Whatever goes up or down afterward will be their gain and loss.
TFB – thanks a lot.
This does clear up a lot of things.
Lisa Garcia says
The Stock award is added to our income so it seems as though our income is grossed up throwing us into paying AMT. Can you do any adjustments with the AMT calculations?
Harry Sit says
@Lisa – Sorry, no.
Am I allowed to offsset the “net proceeds” I received from the sale of my RSU’s with prior year stock losses? Thanks in advance.
…..or can i offest the amount of stock they deducted for taxes against my prior year carry-over losses. Just trying to get rid of that awful carry over balance 🙂
Harry Sit says
@todd – You can’t offset net proceeds with carryover loss. You can only offset capital gains from the sale, if any. Amount withheld for taxes is not capital gains. If you still have carryover losses after offsetting capital gains, they reduce your taxable income by $3,000.
If I use Sell to Cover to pay taxes on RSU’s, am I taxed on the shares that were sold at the time of the sale or at tax filing time?
QQ on what happens to vested RSUs if you leave your company..
In your example, say I use (2) and have paid taxes on vested RSUs and gotten 60 shares. If I leave the company, do I forfeit the right to sell those 60 shares? Or, they are mine – and can sell whenever I want to?
Thanks for your quick response. I noticed you have been providing excellent service to this site over the last couple years. It’s rare to find someone who manages their website so effectively anymore. I have added this site to my Bookmark Bar. Well done.
Harry Sit says
@SP – They are yours, however, as I explained in the other post No Tax Advantage In RSU, there’s no point in keeping the shares after they vest. You are better off selling them and buying something else, unless you think that stock is the best among thousands of other stocks.
Thanks @TFB and I wholeheartedly agree with @todd about your diligent replies to the posts.
Thanks for the article TFB.
Can you help define “vest”?
If I live in California for four years and vest my RSUs over that time period, but there is no IPO. A year later move to a state with no income tax and the company IPOs and I sell my share.
Will California be able to tax me for those RSUs that were earned while I lived there even though the company wasn’t public and I didn’t sell until I lived in Washington.
When a company issues RSU’s and paysout said to an employee, then buys back the RSU’s when the employee terminates, does the former employee need to be issued a Form 1099 on the buyout since they have already paid tax on the RSU’s via their W2 Form?
“After you acquire the shares, you can gift the shares to them. They get your basis. Whatever goes up or down afterward will be their gain and loss.”
I thought only gains, not losses can be used when stocks are gifts.
Matt V says
It depends whether the FMV is below or above the donor’s basis. If the FMV at gift is below the donor’s basis you would have a dual basis. Depending on what price you sell it at, you would use either the donor’s original basis (FMV at sale > donor’s original basis) to determine your gain or you would use the FMV at the time of gift as your basis (FMV at sale < donor's basis) and show a loss. If you sell the stock between the FMV and the donor's basis, there would be no gain or loss.
Matt V says
“When a company issues RSU’s and paysout said to an employee, then buys back the RSU’s when the employee terminates, does the former employee need to be issued a Form 1099 on the buyout since they have already paid tax on the RSU’s via their W2 Form?”
An employee is taxed on W2 at time of vest (unless 2.5-month short term deferral is elected which would tax on W2 at distribution) as ordinary income. If these shares are held and later sold, this would be considered a gain/loss and a 1099 would be issued for the proceeds. You would need your basis (ordinary income show on W2) to offset the proceeds on your Schedule D.
In short, yes, the 1099 would reflect any gain/loss whereas the W2 is the taxable event for employee income.
RSU’s are taxed on the date of vesting for the full vested amount. On a same day sale, I would be paying capital gains at a higher tax rate (like a disqualifying disposition), similarly for a “sell to cover” option, I would be paying capital gains at a short term rate for the portion of shares I am selling on same day.
Whereas if I chose to pay cash to IRS, risking the vested stock can either go up or down, I can wait 1 yr and then choose to take long term capital gains (or loss). Would that not be a better way to go?
Harry Sit says
No, because regardless which option you choose you are taxed on the date of vesting for the full vested amount just like a cash bonus. Any long-term capital gains only apply to the gains after the vesting date. See Sell Your RSUs As Soon As They Vest.
I receive non-dividend distributions on my RSUs. I’m assuming these distributions are related to my vested RSUs. Since I sold some RSUs in 2016, per my understanding, I need to reduce the cost basis of these shares by these distributions. However, since I’m not sure which RSUs these distributions are related to, I reduced my cost basis of the stock I sold by the full distribution (including prior year one’s). Am I thinking about this correctly or do you have any recommendations on where I can get more information on how to account for this on my taxes properly. I appreciate any insight you have.
Harry Sit says
You can’t attribute all distributions to only the shares you sold. They have to be allocated per-share to all the shares. You should also ask whether the distributions are from only vested shares or both vested and unvested.
When you vest in an RSU award, your tax basis is the Fair Market Value of your company’s stock on the vest date multiplied by the number of shares that you vested in. When you sell shares, you need to somehow track what lots you are selling and what basis you need to apply them against. For example, if you vested in RSUs over 3 years as follows, you will need to know which basis to apply against when you sell:
100 RSUs @ $5 in year 1
100 RSUs @ $10 in year 2
100 RSUs @ $15 in year 3
If you sold 100 shares in year 3, you will need to indicate which lot you are selling from and ensure you are using that basis to calculate your gain/loss. If you decide to use the year 1 basis of $5, then you wouldn’t be able to use that basis again when selling the additional shares.
What is the best way to determine the FMV on the vest date? I was assuming the close price on the vest date mutiplied by number of shares.
You would have to look at the Plan document in which it was granted under, but usually it is the closing stock price on the vest date. If the vest date is a weekend, some plans have rules around valuing at prior day or after the weekend/holiday. Some plans use an average of the high/low for the day. It will be spelled out in your plan. Your award agreement will indicate what plan the each award was granted under.