Should you sell stocks when they vest?
A common rule of thumb is to sell restricted stock units when they vest because there is no tax benefit to holding the stock any longer.
As soon as they vest, they are treated exactly the same as if you had bought your company's shares in the open market. You can sell them and make money.
Generally speaking, when your RSUs vest, you gain full rights and ownership to the value of the units. To cover the income tax need, you may do a net exercise, cashless exercise, or cash exercise. You may still owe additional tax at the end of the year, depending on your specific tax returns.
Restricted stock units are a form of stock-based employee compensation. RSUs are restricted during a vesting period that may last several years, during which time they cannot be sold. Once they are vested, RSUs can be sold or kept like any other shares of company stock.
RSUs are “restricted” because they are subject to vesting conditions, typically based on continued employment or achieving certain performance milestones. RSUs are taxed as ordinary income at the time of vesting and as capital gains when an employee sells vested stock shares.
Key Points: A common rule of thumb is to sell restricted stock units when they vest because there is no tax benefit to holding the stock any longer. In a silo, selling RSUs as they vest often makes sense, but the decision can be complicated if you have other forms of equity, namely employee stock options.
If you require immediate cash, selling your vested shares might be the best option. Evaluating long-term objectives, such as retirement planning: Your long-term financial goals, like retirement or wealth accumulation, should also factor into your decision.
Selling RSUs immediately upon vesting is a common approach for many individuals. The reason behind this strategy is to avoid any potential decline in the company's stock value. By selling right away, you can lock in the value of your shares and mitigate potential risks tied to stock market fluctuations.
Once you own a restricted stock unit, you can sell these shares subject to the same rules and conditions as any other share of stock. With a publicly traded company, you can contact your brokerage of choice and sell the shares directly.
- Hold Your Stock Options.
- Initiate an Exercise-and-Hold Transaction (cash for stock)
- Initiate an Exercise-and-Sell-to-Cover Transaction.
- Initiate an Exercise-and-Sell Transaction (cashless)
Do you pay taxes when you sell vested stock?
Initially, the fair market value of the shares at the time of vesting is subject to income tax. Subsequently, any appreciation in the value of the shares post-vesting is subject to capital gains tax when the shares are sold. The rate of capital gains tax will depend on how long the shares are held before being sold.
When a restricted stock vests, you can sell the shares you've received. It's important to consider your risk tolerance, asset allocation, and investing goals to decide on the best time to sell your restricted stock, just as you would with any other security in your portfolio since that is what it's now become.
So how do RSUs get taxed? You'll owe taxes on your equity compensation twice, at vesting and when you sell. Vesting - On your vesting date, you automatically own shares of the company stock. The stock has a fair market value which is your cost basis.
Some investors opt to sell their RSUs right away, before they have an opportunity to gain or lose value. It is a savvy way to minimize these capital gains taxes and avoid RSUs being taxed twice.
Because RSU income is considered supplemental, the withholding rate can vary between 22% and 37%. Usually, your employer will liquidate a percentage of the shares to cover the withholding requirement. In addition to federal income tax, RSU income may be subject to state and local income taxes.
RSUs are taxed as income to you when they vest. If you sell your shares immediately, there is no capital gain tax, and you only pay ordinary income taxes. If instead, the shares are held beyond the vesting date, any gain (or loss) is taxed as a capital gain (or loss).
According to IBD founder William O'Neil's rule in "How to Make Money in Stocks," you should sell a stock when you are down 7% or 8% from your purchase price, no exceptions.
It's common for investors to sell shares when they've reached a certain profit goal. Suppose a particular stock has experienced significant growth and achieved the return you aimed for. In that case, you might decide to sell and secure your gains.
Vesting is not a taxable event and so you owe no tax on vesting. You only have to pay tax on the gain when you sell the shares. In contrast, if you do not file a Section 83(b) election , you effectively defer being taxed until vesting.
Should the price of the stock increase, the total value of your restricted stock units goes up, too. If the company's shares started at $50 per share, but rise to $75 per share over your 3-year vesting period, then the total value of your RSUs would move from $50,000 to $75,000.
Can RSU go down in value?
An RSU is a promise from your employer to give you shares of the company's stock or the cash equivalent on a future date. You can think of RSUs as a cash bonus that can go up or down in value.
Hence, the sell-to-cover method can be a great way to let employees reap some of the fruits of their labor over the years while still maintaining some exposure to the share and be a part of future value creation.
If more than one lot has the same price, the lot with the earliest acquisition date is sold first. Shares with a long-term holding period are sold first, beginning with those with the greatest cost basis. Then, shares with a short-term holding period are sold, beginning with those with the greatest cost basis.
Vesting period is determined by your plan rules. Could take approximately one or two days to complete. Typically within two market or business days after vesting.
Once they vest, you can keep your RSU shares or sell them, before or after you leave your company.
