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19g6ul1qkoj4oΒ inΒ Β 
Site Reliability EngineerΒ 8 months ago

RSU Tax Implications

Due to current market outlook I just sold all of my recently vested RSUs. I keep hearing about how this sell may be considered a capital gain at tax time and I haven't been able to wrap my brain around that concept yet. Anybody have any knowledge on this or some good resources that may be able to break this down?

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19g616l0r0zenvFrontend Software EngineerΒ 8 months ago
Short answer: if you sell your RSUs immediately upon vest, it is likely that they will sell for the same price as the fair-market value (FMV) assigned to them when they vest. If this happens, you will have neither a capital gain or loss, and will owe $0 in *capital gains* taxes. More detailed answer: In the U.S., there are two types of tax that typically apply to RSUs - income tax and (possibly) capital gains taxes. The income tax portion hits when the RSU vest. Often, but not always, companies will withhold a % of the vested shares to satisfy your income tax obligations (this is often called "sell to cover" because a portion of your vested RSUs are sold at the time of vesting, and the proceeds are withheld by the company just like with your paycheck). The amount of tax that needs to be withheld (sometimes different from what actually gets withheld) varies based on your income level, deductions, filing status, etc, but a good back-of-the-envelope method is the top of your marginal tax rate (24/32/35/37% depending on the total of your income + RSU value in the year) + 1.45% (medicare) + 6.20% (social security -- only if you haven't passed $140,000 in income for the year yet) + 0.9% (addtl medicare tax, on amounts over $200,000/yr) (that's federal). Or, if you just want a simple number, about 35% for the feds. Additionally, that income may be subject to state and local taxes depending on where you live, which could be anywhere from an additional 0-14%. That first tax amount is assessed on the entirety of the value of the the RSU at the time of vest. So, if your company stock is trading at $20 a share when your RSUs vest, and you get 5,000 shares, the income taxes would be assessed on a fair-market value of $100,000. The second tax that can apply to RSU is capital gains tax. There are two variations of capital gains: short-term and long-term. These rates apply to the *difference* between the value that you sell your RSUs for and the FMV (fair-market value) that was assigned to them when they vested. Short-term cap gains apply to any RSU held for less than a year before sale, while long-term kick in at one year of ownership between vest and sale. So, if you get that $100,000 of RSU grant and hold it for a month and then sell the entire thing for $125,000, you would owe short-term cap gains on $25,000. If you got that $100,000 and sold it a year later for $150,000, you would owe long-term cap gains on $50,000. If you got a $100,000 RSU grant and immediately sold it such that there was no change in the price of the stock between vest and sale, you would owe short term cap gains on $0 (aka nothing). Short-term cap gains are assessed at your ordinary income tax rate (so the 24/32/35/37% above as a back-of-the-envelope). FICA taxes (medicare and social security) do not apply to short term cap gains. State and local taxes do tend to apply depending on where you live, but it can get tricky because some states tax cap gains differently from earned income. Long-term cap gains are assessed at rates of 0/15/20% depending on your income. FICA taxes don't apply, but state and local taxes may. There is also the fun (/s) case of when you sell an RSU for less than the FMV that was assigned to it when it vested. This would incur what's known as a capital loss. Capital losses can be offset against capital gains on your taxes. Or, if you have no capital gains to offset, you can offset some of your ordinary income (but it's a really small amount, like $3,000, though typically the rest can be carried forward into subsequent years.......) This is really just the basic way it works, it can get more complicated from there, but if you're dealing with multiple RSU grants per year and different sale time frames generating cap gains and losses you should really find yourself a good financial advisor and/or CPA for your tax preparation to make sure you don't end up with any nasty surprises from the IRS.
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19g6ul1qkoj4oSite Reliability EngineerΒ 8 months ago
This helps a lot. Thank you! Definitely need a CPA going forward though.
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