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I have been receiving RSU grants from my employer every year, and was exercising them and selling them soon after. E-Trade(employer provided brokerage account) tells me they withheld taxes at the time of granting. They did so by "shares traded for taxes" which means I received only a fraction of the shares after some were withheld.

Come the end of the year, E-Trade gives me a 1099-B form that treats the entire value from the sale of my shares as capital gain/loss. I foolishly believed whatever TurboTax said and paid taxes on that capital gain. Did I pay unnecessary taxes?

Estimated Tax Withholding

Tax Description Taxable Gain    Effective Tax Rate  Withholding Amount
US-FIT  $4,460.40   25.00%  $1,115.10
NC-SIT  $4,460.40   5.75%   $256.47
US-FICA $4,460.40   6.20%   $276.54
US-FMED $4,460.40   1.45%   $64.68
US-FIT  $2,823.74   25.00%  $705.94
NC-SIT  $2,823.74   5.85%   $165.19
US-FICA $2,823.74   6.20%   $175.07
Total Estimated Tax Withholding $2,758.99
>> Shares Traded For Taxes: 45  << Tax Status:  Paid at Vest

Out of 118 shares I was granted, 45 were withheld for taxes. I paid taxes on the sale of remaining 73 shares.

Anybody knows how this works?

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Did I pay unnecessary taxes?

Probably. You should have put in the value (price*shares) at the time of vesting as the cost basis - the difference between that and the price you sold it for is your additional gain/loss that you pay capital gains tax on. The actual value of the stock at vesting should have been taxed as regular income (which was paid at that time by withholding shares). I know from experience that eTrade is not good at identifying the right cost basis on their tax forms. I have always had to manually calculate the cost basis by looking at the price history for the stock on the day that it vested.

However, it also depends on whether or not those shares (and the amount of tax withheld) were included in your W-2 as income, which I'm assuming they were.

I would definitely talk to a CPA or tax advisor and see if you need to file amended returns. TurboTax can also create amended returns, so if you can figure out the right cost basis for each vest, you might try using that, but it would probably be worth getting some expert advice in this scenario. The good news is you can likely get back the excess tax you paid.

Anybody knows how this works?

To summarize what happens in general, say you are in a 25% tax bracket, and have 1,000 shares that vest. On that day, the closing market price is $10/share. The company (or broker - I'm not sure) withholds 250 shares (25%) to pay taxes. You receive 750 shares in your brokerage account, and the company records $10,000 in income and $2,500 in taxes withheld for you.

The next day, the stock rises to $11/share and you sell the lot. Your cost basis is $7,500 (750 * 10) and your proceeds are $8,250 (750 * 11). Your gain is therefore $750.

Come tax time, the vested shares and the amount withheld should be included on your W-2, so that part is covered. You just need to report the $750 in capital gains, which will be taxed at your marginal rate since you held them for less than a year.

  • You mean, withholds 250 shares... – Wesley Marshall Mar 18 '17 at 18:28
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I know this question is old, but just wanted to let you know in the case you haven't amended your returns yet. Yes, you have likely overpaid on taxes. You have essentially double reported income, once as ordinary income and again as capital gain. The cost basis described above is correct.

One thing to be sure to check is that the value of the shares withheld and paid by E-trade on your behalf were included in your withholding reported on your tax return. I just caught this on a client's prior year return prepared by another CPA. The W-2 income included the stock options, but the withholding did not include the stock withholding, only the salary withholding. The difference was $248,000, which they had overpaid in taxes.

  • a tech and wine CPA

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