Tax implications of restricted stock units

Question

Last May I had been with my company for a year so I got the first grant of restricted stock units (RSUs) that vest over 4 years. Based on this answer to a related question, I am thinking I should have sold them immediately. But now I have kept them for over half a year and the stock price has increased. As I understand, the RSUs are taxed as regular income, and my cost basis for the remaining shares (after some were sold to cover tax withholding) is their value at the time of the grant.

So although I'd like to sell them, at this point wouldn't I be better off holding on to them for a year so I get the long-term capital gains tax rate rather than short-term? However, after I have had the stock for a year I will get another grant of RSUs. How does the capital gains tax work when you have some shares that were just just granted and others that you have had for a year? Did I shoot myself in the foot by not selling immediately?

FOLLOW-UP: I am also thinking about participating in an employee stock purchase plan (ESPP) which offers a 15% discount, and selling those shares immediately as well. But I think I might have the same issue with newly acquired stock being grouped together with stock held for several months or longer that has gone up in value. How does this work with regard to short- or long-term capital gains taxes?

Answer 1

RSU are taxed when vested, based on their value at that point, as salary. If you don't sell to cover, you need to pay the taxes, if you sell to cover - you sell the portion that is worth the taxes (brokers do that automatically, and remit the taxes on your behalf).

Once paid your taxes, it becomes a regular stock position - short term gains if you sell within a year after vesting, long term if you wait for more than a year. The consideration whether to wait or sell is as with any other investment, them being previously restricted has no meaning. You calculate the gain for each position, so the fact that you have more than one position is not a problem.

The RSU income and the taxes paid will appear on your W2, so when the broker reports proceeds, you can show the basis and thus calculate the gain. See this question for some useful answers on how to report the RSU sale on your taxes.

Answer 2

My friend Harry Sit wrote an excellent article No Tax Advantage In RSU.

The punchline is this. The day the RSUs vested, it's pretty much you got $XXX in taxable income and then bought the stock at the price at that moment. The clock for long term gain starts the same as if I bought the stock that day.

Historical side note - In the insane days of the Dotcom bubble, people found they got RSUs vested and worth, say, $1M. Crash. The shares are worth $100K. The $1M was ordinary income, the basis was $1M and the $900K loss could offset cap gains, not ordinary income above $3000/yr. Let me be clear - the tax bill was $250K+ but the poor taxpayer had $100K in stock to sell to pay that bill. Ooops. This is the origin of the 'sell the day it vests' advice.

The shares you own will be long term for capital gain a year after vesting. After the year, be sure to sell those particular shares and you're all set. No different than anyone selling the LT shares of stock when owning multiple lots. But. Don't let the tax tail wag the investing dog. If you feel it's time to sell, you can easily lose the tax savings while watching the stock fall waiting for the clock to tick to one year.

Answer 3

With the Employee Stock Purchase Plan stock, if you sell it in less than 18 months from exercise, the discount you bought it at (normally 15%) becomes taxable income and included in your W-2.