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How are RSUs taxed when I sell them?
RSUs are taxed at two moments. When they vest, the full value is taxed as wages, and that value becomes your cost basis. When you sell, only the change since vesting counts: a gain or loss, short term if you held a year or less, long term after. California taxes both at ordinary income rates.
Most of the tax on your RSUs is already paid before you ever sell.
Restricted stock units are a promise of shares. Nothing is taxed when they are granted. On the day they vest, the shares become yours, and their full market value that day is taxed as wages. It shows up on your W-2 next to your salary.
That value also becomes your cost basis. When you sell, the only thing left to tax is the difference between the sale price and the price on the vest date. If you sell the same day they vest, there is usually almost nothing left to tax.
Quick note on who is talking. opfinances.com is a licensed insurance agency. We are not a financial advisor, not a fiduciary, and not a tax adviser. This is general education, not advice about your situation.
The 22% your company withholds is often not enough.
Illustrative arithmetic, not a tax estimate. An engineer in San Jose has 1,000 shares vest at 100 dollars. That is 100,000 dollars of wages on the vest date.
Most companies sell some of the shares to cover withholding. Federal withholding on supplemental wages is a flat 22% up to 1,000,000 dollars a year, so 22,000 goes to the IRS. California withholds 10.23%. Social Security and Medicare come out too.
The problem is that 22% is a flat rate, not your rate. If this household's top federal bracket is 35%, that vest was short by about 13,000 dollars, and the bill shows up in April, sometimes with an underpayment penalty on top. Several vests a year can add up to a painful surprise.
When you sell, only the move since the vest date is taxed.
Say the engineer kept 700 shares with a basis of 100 dollars each and later sells at 130. The gain is 30 dollars a share, or 21,000 dollars.
Held a year or less from the vest date, that is a short term gain, taxed federally like wages. Held more than a year, it is long term, and the federal rate drops to 15% or 20%, plus the 3.8% net investment income tax at higher incomes. California does not care how long you held. It taxes the gain as ordinary income either way, up to 13.3%.
If the stock falls to 70 instead, you have a 30 dollar a share capital loss, even though you already paid income tax on the 100. The loss offsets other gains, plus up to 3,000 dollars a year of other income, and the rest carries forward. Selling at a loss within 30 days of another vest can turn it into a wash sale, which delays the loss.
Your 1099-B can make you pay tax on the same money twice.
This is the expensive mistake. Brokers often report RSU shares on the 1099-B with a cost basis of zero, or leave the basis blank, because the income part was already on your W-2.
If you or your software takes that form at face value, the whole sale price looks like gain. On the 700 shares sold at 130, that is 91,000 dollars of gain instead of 21,000. You would be taxed again on 70,000 dollars you already paid tax on at vest.
The fix is on Form 8949. Your broker usually sends a supplemental statement with the adjusted basis. Use that number, and keep your vest confirmations so you can prove it.
Holding for the lower rate is a stock decision, not a tax decision.
At vest, the tax difference between selling and holding is close to zero. Holding only changes the tax on future growth. So the real question is simple: if your company had paid you 100,000 dollars in cash, would you use all of it to buy its stock?
Many people in the Bay Area end up with a large share of their net worth in one employer, the same company that pays their salary. A one year wait to save a few points of federal tax on the gain can cost far more if the stock drops in that year.
A large position that has grown for years is where planning matters.
For shares sold soon after vesting, there is usually little to plan around. The math changes for shares that have climbed for years, or stock that came from an early stage company and now carries a large gain. Selling all of it at once can push most of the gain into the top brackets in one year.
There are structures that can change the tax on a sale of appreciated stock. We are not going to list them, because which ones fit depends on facts only you have. They are worth a real conversation before you sell, not after.
One more thing about incentives. We are paid when a client ends up in a product we offer. Nobody is paid when the answer is that you sold at vest and owe almost nothing. Weigh anything anyone tells you with that in mind, us included.
Before you decide
Questions worth asking.
What was the market value on each vest date, and where does that show up as my cost basis?
Does my 1099-B report the right basis for these shares, or do I need the supplemental statement for Form 8949?
Was the 22% federal withholding at vest enough for my real bracket, or should I make an estimated payment now?
If I wait for long term treatment, how much do I actually save, and how far could the stock fall before that saving is gone?
How much of my net worth is in my employer's stock, counting unvested units?
If you are recommending I hold, sell, or move this money into something, what do you earn on each choice?
Related
Are RSUs taxed twice?
They should not be. The vest value is taxed as wages and becomes your basis, so only the change after vesting is taxed at sale. Double taxation happens when a 1099-B shows a zero basis and nobody corrects it on Form 8949.
Should I sell my RSUs as soon as they vest?
Selling at vest adds little or no tax, because the sale price is close to your basis. Holding only changes the tax on future growth, so the bigger question is whether you want that much money in one company's stock.
Does California tax long term capital gains on RSUs at a lower rate?
No. California taxes capital gains as ordinary income no matter how long you held the shares, at rates up to 13.3%. The lower long term rate only applies on the federal return.
Can I file an 83(b) election on RSUs?
No. An 83(b) election applies to restricted stock that you own at grant. RSUs are not shares until they vest, so there is nothing to elect on.
Do I still owe California tax on RSUs if I move out of state?
Often, on the vest income. California generally taxes the part of each vest tied to days you worked in California between grant and vest. A gain on shares sold after you become a nonresident is generally not taxed by California.
Where this fits.
This question sits inside a bigger one. Tax Deferred Strategies walks through the whole decision rather than this one piece of it.
On Point Finances is a licensed insurance agency, not a tax, legal, or investment adviser. This page is general education, not a recommendation, and reading it does not create a client relationship.