Restricted Stock Units (RSU) Sales and Tax Reporting

http://thefinancebuff.com/2008/04/rsu-sell-to-cover-deconstructed.html

RSU stands for Restricted Stock Units. It’s the new form of stock-based compensation that has gained popularity after the employers are required to expense employee stock options. The biggest difference between RSUs and employee stock options is that RSUs are taxed at the time of vesting while stock options are usually taxed at the time of option exercise. The employer is required to withhold taxes as soon as the RSUs become vested.

In a previous post, Restricted Stock Units (RSU) Tax Withholding Choices, I wrote about what I chose among the three tax withholding choices — same day sale, sell to cover, and cash transfer — and why. This time I’m writing about how to account for taxes on the tax return, especially if you use tax software like TurboTax or TaxCut.

I’m going to use this simple example:

Suppose you had 100 RSUs vested on October 31, 2007. The closing price of the stock on that day is $50, and the tax withholding rate is 40%.

Regardless of which choice you made for tax withholding — some employers don’t give you a choice and sell to cover is your only option — your employer will include on your W-2 as wages the total value of the vested RSUs. In our example, it’s $50 * 100 = $5,000. They will also withhold the same amount of taxes regardless of your choice. In this example it’s $5,000 * 40% = $2,000. How you account for taxes on your tax return for the rest will depend on your tax withholding choice.

1. Same Day Sale. If you make this choice, you sell everything. Let’s say on the day after the vesting date the shares are sold at $50.10 per share, less a $20 commission and $1 SEC fee. You total proceeds before tax withholding is $50.10 * 100 – $20 – $1 = $4,989. The employer withholds $2,000. You are left with $2,989. At tax time, you will receive a 1099-B from your broker listing the stock sale proceed of $4,989. You enter in TurboTax or TaxCut, or on Schedule D of Form 1040:

Description: 100 shares XYZ, Inc.
Net Proceeds: 4,989
Date of Sale: 11/01/2007
Cost Basis: 5,000
Date Acquired: 10/31/2007

Your cost basis is the amount your employer included on your W-2, which is the closing price on the vesting date times the number of shares vested. In this example, you will show a short-term loss of $11 on your tax return because of the brokerage commission and the SEC fee. The income and the associated tax withholdings are already included on your W-2. Use those numbers as-is.

2. Sell to Cover. [Update on April 9, 2008: I wrote a follow-up post RSU Sell To Cover Deconstructed to clarify this option. Jump ahead to that post if you'd like.] If you make this choice, or if you don’t have a choice, your employer sells just enough shares to cover the tax withholding. Using the same numbers as in same day sale, they sell 41 shares. The SEC fee is a bit less, say $0.40. You receive from the sale $50.10 * 41 – $20 – $0.40 = $2,033.70. The employer takes away $2,000 for tax withholding. You are left with $33.70 in cash and the remaining 59 shares. At tax time, you will receive a 1099-B from your broker listing the stock sale proceed of $2,033.70. You enter in TurboTax, TaxCut, or on Schedule D of Form 1040:

Description: 41 shares XYZ, Inc.
Net Proceeds: 2,033.70
Date of Sale: 11/01/2007
Cost Basis: 2,050
Date Acquired: 10/31/2007

Once again, your cost basis for the shares you sold is the amount your employer included on your W-2 for those shares, which is the closing price on the vesting date times the number of shares you sold for tax withholding ($50 * 41 = $2,050). After the sale, you show a short-term loss of $2,050 – $2,033.70 = $16.30 because of the brokerage commission and the SEC fee. Again, the income and the associated tax withholdings are already included on your W-2, and you just use those numbers as-is.

For the remaining 59 shares, you keep a cost basis of $50 per share ($50 * 59 = $2,950). You have to remember this number until you sell the remaining shares. Whenever you sell them, you enter in TurboTax, TaxCut, or on Schedule D of Form 1040:

Description: 59 shares XYZ, Inc.
Net Proceeds: whatever you sell them for, copy from 1099-B
Date of Sale: your date of sale
Cost Basis: 2,950
Date Acquired: 10/31/2007

You will show a short-term or long-term gain or loss for these remaining shares depending on your date of sale and the sale price.

3. Cash Transfer. If you make this choice, you give your employer cash for the tax withholding and keep all the shares. You can sell the shares either immediately or keep them for however long you like. The tax accounting is the same as if you bought the shares at the closing price on the vesting date. Whenever you sell them, you enter in TurboTax, TaxCut, or on Schedule D of Form 1040:

Description: 100 shares XYZ, Inc.
Net Proceeds: whatever you sell them for, copy from 1099-B
Date of Sale: your date of sale
Cost Basis: 5,000
Date Acquired: 10/31/2007

You will show a short-term or long-term gain or loss for these shares depending on your date of sale and the sale price. The income from RSU vesting and the associated tax withholdings are already included on your W-2, and you just use those numbers as-is.

That’s all. Hope this is helpful to someone looking for info on the tax treatment and implications of RSU sales.