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. 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 for tax withholding. In our example, they sell 40 shares on your behalf. You may have to report sales of stocks on your tax return. There can be two variations here.
3a. The company does not use a broker. Instead of giving you 100 shares, they just hold back 40 shares and give you “net” 60 shares. This is called “net issuance.” You don’t have to do anything special on your taxes unless you sell some of your 60 shares.
3b. The company uses a broker. The shares are sold after vesting. The sale price may be slightly different from the price at vesting. You have to report on your taxes for this “forced” sale. If you sell some of your remaining shares, you will have to report those on your taxes separately.
In scenario 3b, suppose the sale price for the tax withholding sale was $50.60 and the broker’s commission was $20. The net proceeds of the sale was $50.60 * 40 – $20 = $2,004. You report on your taxes:
| Description | 40 Shares XYZ Corp. |
| Date Acquired | 4/20/20xx |
| Date Sold | 4/21/20xx |
| 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 as shown in step 3b if your employer used a broker for the sale. 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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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
Bill F says
I had about 900 RSU shares vest last year and I liquidated them all on the day they vested (so no gain/loss), and taxes & brokerage fees were withheld. This was all done in a single brokerage transaction, with the net proceeds being distributed to me.
The gross amount and the withheld tax amount (~300 shares) are both reflected on my W2, so no problem there. I would expect then that the only additional tax consequence would be the ‘loss’ associated with the broker fee of about $120 – does that sound right?
My problem comes when I have to break it down in Turbo Tax. First they want me to enter the ‘Total shares vested/released’ (~900), but on the next line it asks for the ‘Shares withheld (traded) to pay taxes’. When I enter the ~300 shares withheld for taxes it increases my tax due by ~$4K! This doesn’t seem right since both the gross & withheld tax amounts are already accounted for on my W2. If I leave the ‘shares withheld’ line blank all looks fine…
Any insights or advice?
Thanks!!
Harry Sit says
That’s correct. You only have the brokerage fees as a loss if there is no price difference between vesting and sale. The wizard in TurboTax is very confusing. Don’t use it. Enter it as a regular sale. See http://thefinancebuff.com/restricted-stock-units-rsu-and-turbotax-net-issuance.html
Nitin says
Very useful link, thanks for the information!
I am in similar, “sell to cover”, situation. In 2015, my company awarded me 2 shares, 1 was sold to cover taxes the same day, while other was granted to me (which I have not sold yet). I received 1099-B and 109-DIV, which mentioned $250.57 as proceeds and $0.13 as dividend (both as ordinary and qualified dividend). I guess I will have to file a schedule D; Should I just go to part I (short term gains) and fill out same amount (250.57) in proceeds and cost basis, so that the net gain or loss is 0 in line 7?
Additionally, It asks in part III, line 22: Do you have qualified dividends on Form 1040, line 9b (if yes, Complete the Qualified Dividends and Capital Gain Tax Worksheet in the instructions for Form 1040, line 44 (or in the instructions for Form 1040NR, line 42)? What should do I do with this? I do have $0.13 as dividend? Or, should I just declare it as ordinary dividend on 9a as well as on Schedule B (and forget 9b) to reduce paperwork? I am planning to file paper returns.
Thanks a lot!
jen says
I have tried to read through previous comments, but I am still confused and I think I am over thinking things.
I was awarded RSU’s in which a third vest over 3 years. On Feb 7th I was awarded 17 shares at $315.54 . 17 shares were distributed and they then withheld 7 shares for taxes. On the same date (seperate transaction), I was awarded 28 Shares at $315.54 which were distributed then 11 were withheld for taxes.
My question’s are these
1. Do I report this as a purchase transaction with a cost basis?
Now, I sold them several days later at $330 a share for a total of $8901.89 after fee’s .
2. So is my cost basis $14,199.30 ( the cost of all the shares? even the ones with held for taxes?) or is my cost basis based only on the ones I retained?
In the examples it seems like you split up the cost basis or am I simply confused?
Thank you and I appreciate your helpful articles!
Harry Sit says
Think “per share” when you calculate your cost basis. However many shares you sold, you cost basis was $315.54 per share.
Ryan says
Sorry if you’ve answered this before, but I’m still confused about my RSU situation.
I get 100 shares, and 40 are sold for taxes, so I get 60 shares remaining in my account. I get a 1099B from etrade for the sales of these stocks (the sale of the 40 shares, I did not sell any of the 60 shares I end up with).
However, this income is also included in Box1 of my W2. Doesn’t that mean I’m effectively paying tax twice? Shares are sold to cover taxes, and now my W2 also shows them as wages. I don’t understand how the IRS knows that I already paid taxes on part of my wages. Nothing else on my W2 shows additional taxes paid.
When I enter the 1099B, the shares are bought and sold for the same price, so the net gain is 0, and after I enter the 1099B, nothing changes about my return.
Thanks for taking the time to help me out.
Ryan
Harry Sit says
See Step 3b. Both the income and the taxes are included on the W-2.
Cynthia says
Thank you. Can’t say more than that.
Raymond says
How does my company decide how many shares of my RSU they will sell to cover the taxes? What if they don’t sell enough or even worst sell to many?
Harry Sit says
Using a standard withholding percentage. If they don’t sell enough you will owe more or get a smaller refund when you file your taxes. If they sell too many shares you will get a higher refund when you file your tax return.
Raymond says
Thank you.
So when they sell the shares to pay for my RSU taxes, are the proceeds literally added into box 2, 4, and 6 on my W-2?
Harry Sit says
Yes, and box 17 too for state income tax.
Amanda says
Hi,
Thank for directing me to this RSU link. It’s very helpful. My case falls into step 3b of your article.
Let me repeat my case: I received a form 1099B of 45 shares of RSU sold at various dates. I did not sell any shares yet.
Out of this 45 shares to cover for my tax, my net gain/loss is $147.
I understand that I have to break 45 shares into smaller lots per sale dates.
My first break down is 14 shares, and I went back to my stock account, I know that the total share I am vested for 23 shares, and 14 shares were sold to cover for tax and already reported to W2.
Two questions from Turbo tax gave me hard time.
1. Number of shares sold: do I enter 23 shares (but I did not sell) or 14 shares?
2. Number of shares traded to cover for tax: 14 shares.
If I enter “23” in #1, I got a net gain of a huge amount and a compensation
If I enter “14” in #1, I got a net gain of zero, which is correct.
However, both cases, I see the amount I own uncle Sam increases a lot. if a net gain is zero, it shouldn’t increase, correct? What do I do wrong here?
I noticed you mentioned about spread sheet, and enter it manually. How do I get there? I don’t see this option in Turbo Tax.
Thanks for helping.
Harry Sit says
It’s shown in the blog post you came from, except you are entering the shares the employer sold not the ones you sold. Same procedure.
Amanda says
I’m able to enter RSU without any capital gains as shown in step 3b above.
When I did smart check, I got an message of Employer Stock Worksheet: line #25, “column b-2 should be entered.” I did go back and broke the sales into small lots (even they were sold/acquired the same dates). No matter what I do, I still get the same message. Can you please advise?
Harry Sit says
Delete that worksheet and start over. You see the entire process doesn’t mention anything about these shares are employer stock.
Amanda says
The worksheet created by TurboTax, I didn’t create it myself. You mean delete the worksheet and the software will re-create it?
Is this worksheet submitted to IRS?
Harry Sit says
https://ttlc.intuit.com/questions/2988950-how-do-i-delete-a-worksheet
TurboTax didn’t magically know you had employer stock. Somewhere you said you had them and it created the worksheet. Now you need to make it forget that you said you had employer stock.
Amanda says
I’m sorry to confuse you. It’s a typo, the worksheet is in fact employee (not employer) stock worksheet. The message is line 25, column 2-b should be entered. But I already entered and I have nothing else to report. I tried to enter “0”. It took it, but asks again after rerun ingredients smart check.
Harry Sit says
Same procedure. Delete it and make it forget you ever mentioned employee stock. Or go through the interview and remove all mentions of employee stock. You just want to treat these as regular stock.
Amanda says
I’m sorry to bother you, I just wanted to make it clear. The stock is RSU, you recommend to treat it like regular stock such as ESPP? But in this case the net gain is zero.
I have tried to reentered, the message is still there.
Harry Sit says
Treat it as regular stock, like random company XYZ, not even ESPP, which has discounts and special treatment. No way TurboTax will create an employee stock worksheet when you just enter sales of random company XYZ stock. It did it only because you told it you had employee stock. Did you follow the steps to delete the worksheet?
Amanda says
I deleted the worksheet, reentered the shares. I noticed that if I treated it as a regular stock, I got capital gain. If I treated as RSU, net gain is zero, but the worksheet recreated.
Can you advise?
Harry Sit says
You said your net gain was $147 in comment 109. When the broker sold the shares the price minus commission wouldn’t exactly match the price on the vesting date. It’s normal to have a small gain or loss.
Amanda says
If I remove the worksheet, and not to reenter the shares, smart check goes through without any issue.
The amount due stays the same.
Question is do I need to submit that worksheet?
Barb says
The confirmation of release for the RSU states that the tax payment method is Trade. Is this the same as net issuance? The W-2 shows the full amount with taxes taken out for 122 shares and the 1099-B only shows the 75 shares that we sold. The remaining were traded for taxes at release of the vested shares. If I understand your explanations correctly, we only report the 75 shares we sold with a cost basis being for 75 shares only times the market value per share at time of vesting. H&R Block is telling me that I need to include the full amount of income for the shares reported on the W-2 to avoid paying taxes twice.
Harry Sit says
That’s correct. If you sold 75 shares, your cost basis in those 75 shares is the price per share on the vesting date times 75.
Barb says
Thank you for your help and straight-forward logic.
Andy says
Thanks for the detailed instructions. Treating sell to cover as a separate RSU sale, really helps to understand how to report it.
One question regarding reporting RSUs sold to cover taxes when the employer used a broker.
Which sale category is this? Box B (Short term noncovered) or Box A (Short term covered).
Amanda says
Look in your 1099B, it should state whether it’s box B or A.
Andy says
Amanda, the RSU sell to cover transaction is not reflected in my 1099B form.
Andy says
Reading all the comments, I get an impression that everyone’s 1099B, whose employer used a broker to sell shares withheld for taxes, includes these transactions.
Mine doesn’t reflect that, but I can look that up in Confirmation of Release documents in my E-Trade account.
What do people refer to when reporting shares sold to cover taxes, when their employer uses a broker for that?
Second question, is it common to have a cost basis as zero for sell to cover transaction? I’m asking because, by looking at the confirmation of release, I see that no fees were paid. Also the shares were sold at FMV, so no price difference exists for this transaction.
Thanks in advance!
Harry Sit says
“Used a broker” refers to using a broker to sell the shares for tax withholding in the open market at the prevailing price minus a commission. When the broker does that, they put it on the 1099-B. It doesn’t sound your employer did that. They just withheld shares in a net issuance.
Andy says
Thanks for your response, @Harry Sit.
I know what a net issuance is, having read your post – “Restricted Stock Units (RSU) Tax Withholding Choices”. And this is what my employer did last year.
This year however, when looking at the confirmation of purchase in E*Trade, I saw that a number of shares were traded for taxes. And that had thrown me off. Since the information was on E*Trade site, I thought the my employer used a broker for this transfer.
The devil was in the fine print: “This information was provided to E*TRADE Securities LLC (“E*TRADE”) by your company.”
That explains everything and it’s indeed a net issuance.
Thanks again for your very helpful posts on this matter.
JM says
Thanks for the great information on your site.
I read through many of the comments and see several mentioning ‘double taxation’.
I believe under taxing exists; and here is my example on a RSU sell-to-cover handled by a broker:
Base pay: 80K
RSU: 10K
4K of stock is sold to cover the 40% taxes on the bonus (vesting same day sell). To make it clean assume I didn’t sell any other shares.
W2 reports 90K wages; and has the 4K sold shares added into the total withholding amount.
Here is where the under taxing happens.
In my perfect world 10K would be subtracted from the W2 amount and reported on a separate form (lets call it the JMRSU form). The bonus money is reported and taxed at 40%.
AT THE BOTTOM OF THE JMRSU FORM THERE WOULD BE A NOTE TO SUBTRACT 10k FROM my 1040 at LINE ‘X’ (somewhere before the final tax table amount, before line 43).
THE 4K BONUS TAX WOULD BE ADDED IN AT THE ‘Other taxes’ SECTION OF 1040, LINE 62 FORM JM.
If the above capital letters statements are not done, then I end up paying standard fed & state tax rates (much less than 40%) on the 10K bonus RSU shares. This works out in my favor.
Even if as in your example; I report the sale (step 3b) it comes out as almost a 0 sum game and I am still ahead. Because the share sale proceeds are added to withholding but not directly applied to the RSU shares.
JM says
OK. Forget what I wrote above.
I just learned that the WITHOLDING on a RSU is 40%, but the actual TAX RATE on the RSU is whatever tax bracket you are in. The withholding of 40% is just a guess by the IRS as to most people’s tax bracket.
Sorry for any inconvenience.
Emmu says
It’s worth a shot to see if you are still replying to questions. I can’t find an answer to this ANYWHERE: my company does sell-to-cover but our stocks are worth quite a lot. So I had 3 shares vest worth $217 each, but the taxes came out to $251, so my employer sold two shares to pay for taxes and gave me one.
So they sold $434 worth of stocks to pay for $251 worth of taxes. What happens to all that extra money? I had two chunks of 3 shares and one chunk of 4 shares vest today, and almost $800 just… disappears?
Will says
@Emmu – Did you ever figure this out? I have the same question!
Aly says
I just want to say THANK YOU for breaking down the scenario in which a company uses a broker and therefore an employee would have to report the sold shares to cover on taxes due to the difference between vesting & sale price. I’ve been scouring the internet trying to understand why I’m paying taxes on shares I didn’t sell myself, and finally understand. Sneaky, sneaky. Thank you!
Arun says
In step 3b, the company sold portion of vested shares for tax purposes but the transaction happened the next day when the shares were higher than the vest date price. The difference is reported as gain but I never received the ‘gain’ amount. Why do I have to pay tax on this again?
Harry Sit says
Because you had a gain. You will get the gain amount back from the IRS and your state (or pay them less) when you file your taxes next year.
Arun says
Thanks. Where in my filing should I report this gain in my next year filing?
Harry Sit says
The broker will send you a 1099-B for the gain. Extra taxes paid will be included on your W-2. You enter these into the tax software.
Arun says
Thank you very much, sir.
Arun says
Hi Harry,
I did some more investigation into my W2 numbers. My W2 reports the wages for the vested RSU grant (No. of stocks * vest price per share). The tax reported for just this vesting in the W2 sums up to (No. of shares sold * sale price). To confirm, the tax reported is based on the sale price and not the vest price.
Based on this, I don’t believe I need to report the phantom gain as reported in the stock plan transaction supplement since the ‘gain’ is part of my taxes paid.
Do you agree?
Harry Sit says
No. Suppose you had a gain of $5,000 and you used 100% of it to pay taxes. The taxes paid will be on your W-2 but the gain won’t be. You still need to report the gain using the 1099-B form from the broker.
Arun says
Harry – so helpful. Thank you. What you say makes perfect sense but how the mechanics will work is not clear to me at all.
If I report the gain of $5,000, I will pay tax on it – let’s say $2,000.
Now I have paid $7,000 = $5000 (gain) + $2,000.
My 1099B only reports proceeds and not cost basis. The stock plan transaction supplement (only sent to me and not IRS) has the detailed numbers.
Who will track the extra $5000 gain I have paid in taxes? How?
How do I recover it from the IRS?
You have already helped me tremendously in understanding this – truly appreciate it.
Harry Sit says
You haven’t paid $7,000. Your W-2 shows you paid $5,000 in taxes. That’s like your receipt from the IRS for your advance payment. When you do your taxes, if the tax form calculation says you should pay $2,000 in taxes on the $5,000 gain, by entering the taxes withheld on your W-2 (“your receipt”), your tax form will show you overpaid and you will get $3,000 back from the IRS.
This is how taxes work for all income, not just from selling vested RSU with a gain. The taxes withheld on the W-2 are only an advance payment. It can be too much or too little. You get a refund if the advance payment was too much and you owe additional taxes if it was too little.
Arun says
Hi Harry, that is so clear – you have explained it well and closed the loop for me.
Thanks once more.
Best
Arun
DJ says
Hi,
I’m not sure If you are replying to comments still but It’s worth the shot.
I received 2 1099B forms from eTrade reflecting a year’s worth of vesting ( 3 times).
first 1099b ( had 6 total transactions):
a) the first vest date had 3 transactions ( 2 sell to cover tax and one reflecting me selling the rest)
b) second vest date had 3 transactions ( 2 sell to cover tax and one reflecting me selling some of the rest.
second 1099b ( had 2 transactions )
a) third vesting date had two transactions ( 2 sell to cover –I did not sell any by my self this time)
According to the article, I should report per 3b. meaning enter each transaction ( all 8) and adjust cost basis per the supplement document Right ?
Harry Sit says
Every transaction on the two 1099-B forms should be accounted for. If the basis shown on the 1099-B form is blank or zero, you should supply the basis.
J says
Thanks for the great article. How does my company determined how many shares to sell for the withholding? I see a common 22% used online, but I had a recent vest where I got 57 shares for the month, but they sold 21 of them to cover. That seems excessively high. I understand I should get it back at the end of the year theoretically, as long as it is reported correctly on the W-2, but I’m just wondering why they would use a much higher amount.
Harry Sit says
Tax withholdings must cover federal, state, and Social Security and Medicare. 22% is only federal. When you add 6% for state and 7.65% for Social Security and Medicare, it isn’t too far off to sell 21 shares out of 57 shares vested.