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I have RSU's vesting from my company periodically in USA. I would like to sell them to diversify in an index fund. How do I choose between LIFO and FIFO for the maximum resultant cash?

FIFO

First in first out. These were vested over a year ago, so they will incur the lower long term capital gain tax. They were were also at a lower price, so the capital gain is larger.

LIFO

Last in first out. These were vested recently, so will incur the higher short term capital gain tax. They are much closer to the current price, so the capital gain is smaller. Some of them might actually be slightly lower than the current price (loss).

What's the difference?

Let's say I sell the recent shares, where the capital gain is close to zero, so therefore the tax is close to zero. That leaves me the old shares which were vested when the price was low. So whenever I sell those old shares in the future, I will have a high capital gain, which will have high tax.

There's also a similar scenario if I sell the old shares first. I'd have lower long term capital gain, but it leaves the new shares stewing in my account. The stock has been climbing consistently, widening the gap in price. In the future, selling those new shares will have a large capital gain.

It appears to me the tradeoff is between paying a lot of tax now or later. In another 10 years, does it really matter whether I paid taxes earlier or later?

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    Tax questions need a country tag. – Chris W. Rea Jul 28 '18 at 18:54
  • The commutative property of multiplication means that two numbers can be multiplied in either order. AxB = BxA. Your example has four variables and assumes that AXB = CxD so the theory is not applicable unless A=C and B=D and they do not. Run the numbers using the correct values of the 4 variables and you'll figure out the answer to "What's the difference?" – Bob Baerker Jul 28 '18 at 19:27
  • You need to consider the cost basis of the shares. Unless you have a capital loss available and that's something you want to take (to offset income elsewhere), there seems to be little reason to take a short-term capital gain when you can get the same revenue by taking a long-term gain. You still have shares either way, and you can hold those shares until they do qualify for long-term gain. – chepner Jul 29 '18 at 16:46
  • Edited the post to say I'm in USA and gave two scenarios. – JoJo Jul 29 '18 at 20:08
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Somewhat atypically, [in the USA] RSUs are taxed at the time they are vested, not when you sell. So I do not think it matters which you pick for accounting purposes since you don't intend to hold on to them.

Quoting Schwab:

With RSUs, you are taxed when the shares are delivered, which is almost always at vesting. Your taxable income is the market value of the shares at vesting.

When you later sell the shares, you will pay capital gains tax on any appreciation over the market price of the shares on the vesting date.

https://www.schwab.com/public/eac/resources/articles/rsu_facts.html

  • The second paragraph in your quote says that RSU’s are taxed again on capital gains when one sells. So they’re actually double taxed - once for receiving them and again for capital appreciation. – JoJo Jul 30 '18 at 16:02
  • The context is selling them immediately (no appreciation). I added the 2nd para so that he would know of what happens after that point, if he decides to keep. Importantly, this is not double taxation. If RSUs vest at 40 and you (later) sell at 45, you pay tax on the 40 immediately and only tax on the 5 later. You are not double taxed, just taxed at different times for different portions. You are never taxed on the same portion twice, and the second portion could even be a loss/write-off! – Simon Sarris Jul 30 '18 at 20:06

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