Why do I pay taxes when stocks vest?
As with RSUs, stock grants typically vest after a period of time, or after certain performance measures are met. You're not liable for income tax until your stock grant vests, at which point you must report income equal to the value of the stock you received.
By paying tax on the grant now, rather than when the shares vest, the current stock price will be established as the cost basis for the shares granted. When the shares do vest, no tax will be due until the shares are sold, regardless of how much the shares may have changed in value.
Double taxation means you pay tax twice on the same income. This often happens when Form 1099-B isn't properly completed, and the tax advisor doesn't know the shares were a form of equity compensation. If overlooked, you might pay ordinary income taxes on the vesting date and again when you sell the shares.
In all of these options, the employer will include the total value of the vested RSU shares in Box 1e of Form W-2 Wage and Tax Statement, along with the amount of your normal wages. Your "basis" in all vested shares you receive is the amount included on your W-2 as income plus any amount you had to pay for the 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.
Long-term capital gains rates are likely the lowest tax on your company shares. In order to minimize your RSU taxes as much as possible, it's typically advisable to hold your shares for at least one year after the vesting date to qualify for long-term capital gains taxes.
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.
RSUs: RSUs are generally taxed as ordinary income at the time of vesting based on the fair market value of the shares on that date. Employees are responsible for paying income tax (and employment taxes) on the value of the vested RSUs. Any subsequent capital gains from selling the shares are taxed as capital gains.
When you receive an RSU, you don't have any immediate tax liability. You only have to pay taxes when your RSU vests and you receive an actual payout of stock shares. At that point, you have to report income based on the fair market value of the stock.
Double taxation occurs when a corporation pays taxes on its profits and then its shareholders pay personal taxes on dividends or capital gains received from the corporation.
Does RSU vest count as income?
Restricted stock units are considered income once vested, and a portion of the shares is withheld to pay income taxes. The employee then receives the remaining shares and has the right to sell them.
- Invest for the Long Term. ...
- Contribute to Your Retirement Accounts. ...
- Pick Your Cost Basis. ...
- Lower Your Tax Bracket. ...
- Harvest Losses to Offset Gains. ...
- Move to a Tax-Friendly State. ...
- Donate Stock to Charity. ...
- Invest in an Opportunity Zone.
When your award is vested or distributed, your employer will withhold ordinary income and FICA† taxes. The tax amounts, along with the income from the value of your shares, may be included on your W-2. 1099-NEC. The information on your W-2 (or 1099-NEC) is used to fill out tax form 1040.
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.
When the dust settles from vesting, paying tax, and obtaining your share ownership, you need to decide whether to keep the shares or sell them. If you keep your shares, you will be subject to the risk-reward trade-off of owning a single stock position.
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.
With some investments, you can reinvest proceeds to avoid capital gains, but for stock owned in regular taxable accounts, no such provision applies, and you'll pay capital gains taxes according to how long you held your investment.
If you usually get a tax refund, there are several reasons you might find that you owe taxes instead. These include receiving unemployment benefits, changing jobs, sold stock, or made money from a side hustle. Is it better to owe tax or get a refund at the end of the year?
For nonstatutory options without a readily determinable fair market value, there's no taxable event when the option is granted but you must include in income the fair market value of the stock received on exercise, less the amount paid, when you exercise the option.
However, it's important to be aware of the wash sale rule when selling RSUs. A wash sale occurs when you sell an asset at a loss and buy the same or a substantially similar asset within 30 days before or after the sale. If this happens, the loss will be disallowed, and you won't be able to claim it on your tax return.
Can you defer RSU taxes?
Tax deferral allows you to delay paying taxes on your RSUs until a later date, potentially reducing your tax liability. To defer taxes on RSUs, you need to follow specific rules and meet eligibility requirements. The benefits of tax deferral include increased cash flow and the ability to invest the deferred tax amount.
When selling RSUs/stock at a loss, you'll be officially locking in losses, which are called realized losses. These realized losses are tracked for tax purposes and will eventually end up providing you with a benefit. Realized losses can benefit you in two ways: They can offset capital gains.
Offsetting RSU Tax
Normally, your employer will withhold some shares to cover the tax bill, and you'll receive the remaining shares. This is where the concept of RSU offset comes in. Offsetting RSU tax involves selling a portion of your vested shares to cover the tax withholdings.
A good RSU offer is one that should incentivize you to put your best foot forward. One of the primary purposes of offering employees company equity is to encourage them to feel as though they have a stake in the company.
Both restricted stock and RSUs become taxable only when the vesting schedule has been completed. With restricted stock, the full amount of the vested stock has to be taxed as ordinary income in the vesting year.
