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After I joined my new job they granted me some rsu's which vest over 4 years. Now I did a lot of research on how they work but there is still a tiny part I am not sure about.

Its been a year and I've got 25% of my rsu's vested and ready to sell via etrade. From what I've understood, etrade first deducts 'x' shares to pay for taxes and then shows the remaining amount as sellable. I have a few questions about this:

  1. Is the remaining amount tax free? As in, if the amount shown (which I can sell) on etrade is $5000 then if I sell the entire shares will my bank account be increased by $5000?
  2. What happens if the stock price goes up and I land up with $8000 in my etrade account? (From what I read this {$3000} is considered as a capital gain and ill have to pay 33% tax on that but am not sure).
  3. Say the stock price was $5 initially. Etrade paid taxes on that and left me $5000 which I can sell. What happens if the stock price goes down to $3 tomorrow and my sellable amount becomes $3000? I have already paid tax when it was $5 so will I be refunded the extra tax I paid? Thanks for all the help.
  • @sotcks_noob some companies already withhold the taxable RSUs before they hit your brokerage, so you should check that to make sure etrade isn't doing something redundant. – CQM Nov 23 '16 at 19:24
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    @sotcks_noob you can get your capital gains tax lower by holding for a year. If you are in the 33% tax bracket, then you will also make a killing writing calls throughout the year, lowering your cost basis and giving yourself income, giving you the opportunity to strategically sell the actual shares in the future at a much lower tax rate closer to 15% before deductions. – CQM Nov 23 '16 at 19:27
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Is the remaining amount tax free? As in, if the amount shown (which I can sell) on etrade is $5000 then if I sell the entire shares will my bank account be increased by $5000?

The stocks they sell are withholding. So let's say you had $7000 of stock and they sold $2000 for taxes. That leaves you with $5000. But the actual taxes paid might be more or less than $2000. They go in the same bucket as the rest of your withholding. If too much is withheld, you get a refund. Too little and you owe them. Way too little and you have to pay penalties.

At the end of the year, you will show $7000 as income and $2000 as withheld for taxes from that transaction. You may also have a capital gain if the stock increases in price. They do not generally withhold on stock sales, as they don't necessarily know what was your gain and what was your loss. You usually have to handle that yourself.

The main point that I wanted to make is that the sale is not tax free. It's just that you already had tax withheld. It may or may not be enough.

  • US brokers have tracked basis and holding period (and thus gain/loss) on nearly everything for decades, and a recent law requires them to do so for new holdings (beginning 2011-14 depending on type) which this Q probably is; at year end you get 1099-B showing basis for reported items and 'supplemental information' showing it for unreported items. But they generally withhold only when (and as much as) the law requires, which it does for RSUs and some option exercises, but not simple sales. – dave_thompson_085 Nov 25 '16 at 20:12
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(I'm assuming the tag of United-states is accurate)

  1. Yes, the remaining amount is tax free -- at the current price. If you sell at exactly the original price, there is no capital gain, no capital loss. So you've already payed the taxes.

  2. If you sell and there is a capital gain of $3000, then you will pay taxes on the $3000. If 33% is your marginal tax rate, and if you held the stock for less than a year, then you will keep $7000 and pay taxes of $1000. Somehow, I doubt your marginal tax rate is 33%. If you hold the stock for a year after eTrade sold some for you to pay taxes, then you will pay 15% on the gain -- or $450.

  3. eTrade sold the shares to pay the taxes generated by the income. Yes, those shares were considered income. If you sell and have a loss, well, life sucks. However, if you sell something else, you can use the loss to offset the other gain. So if you sell stock A for a loss of $3000, and sell stock B at a gain of $4000, then you pay taxes on the net of $1000.

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