Remember, as soon as you become vested in the RSUs, your employer adds their value to your W-2 income and tax is due. So what happens if the value of the stock drops? Well, it’s too bad. You’ve already paid taxes on the RSUs, and it doesn’t matter that their value has decreased. In fact, you can’t get any relief until you sell the stock. Then, you can enter a capital loss on your tax return. Although you can use capital losses to offset capital gains, you can only deduct $3000 of capital losses per year.
If the stock price increases, you are in good shape. If you wait more than a year to sell the stock, then you can report the stock sale as a long-term capital gain. Otherwise, it’s a short-term capital gain. Brycast Financial Planning in Austin Texas --- We Can Help
Income Tax Preparation in Austin Texas
contact: service@brycast.com http://www.brycast.com/
Enrolled Agent; Investment Advisor Representative
Income Tax Preparation in Austin Texas
contact: service@brycast.com http://www.brycast.com/
Enrolled Agent; Investment Advisor Representative
This, along with part 1, has been very helpful; thank you! I'm in this situation with RSUs and the broker. The broker sold stock to cover the taxes, and I held on to the stock for a couple of months. It went up, and now I'm trying to figure out my cost basis. Here is an example:
ReplyDelete* 100 RSUs, $10 each vest = $1000
* Let's say taxes were $250, so they sold 25 shares to cover; that leaves me with 75 shares
* The stock goes up $1 and I sell. 75 * $11 = $825 due to me
Since the stock went up I assume I owe more taxes. Is the cost basis for these shares $750 (75 * $10, the amount already taxed)? So I'd owe taxes on $75 ($825 - $750)?
Thanks!
Hello,
ReplyDeleteYou're correct, your cost basis is $750 for the 75 remaining shares. The cost basis was established on the vesting date. Depending on how long you held the 75 shares before you sold, the transaction would either be reported as a long-term or short-term capital gain.
Hi, thanks for your post. It is very helpful. I had a quick question though.
ReplyDeleteIf the stock goes down, then how does one recover taxes which were already paid on a higher amount?
So, for example, if one gets 100 RSUs at $5 and out of those say 10 RSUs were sold by the broker because the person chose the sell-to-cover option. So, he paid 10*$5 = $50 in taxes on an income of 100*$5 = $500 and he now has 90 RSUs left in his account.
Now, if the stock goes down to $2, and he now sells those RSUs, the money he finally gets is 90*$2 = $180 as opposed to $500 on which he had paid taxes.
In the case of capital gains, when the stock goes up, the person has to pay "additional" taxes on the "additional" gains he got on those 90 RSUs which he had.
But, in this case, would he calculate his net loss as
$500-$180 = $320
or
$450-$180 = $270
where $450 = 90*$5
Thanks.
Think of it this way. You bought 100 shares at $5/share. You sold 10 shares at $5/share. You are selling the remaining 90 shares at $2/share.
DeleteFor 90 shares the cost basis is $450 (90shares * $5/share).
Sold those 90 shares and received $180 (90shares* $2/share).
Loss = $270 ($180 - $450)
Okay. I now get it. Thanks so much for clarifying. I really appreciate your help. And again your post is very helpful.
DeleteHi, thanks for your article. If you opt for net shares to cover taxes, are the taxes somehow reported on the W-2? My concern is double-paying the taxes. Once in net shares, and then again on the "income" reported.
ReplyDeleteBoth the additional income and taxes should appear on your W2, added to the amounts in boxes 1 & 2. Some W2 forms will have a shaded area where they provide additional details about your income for the year. Also, some employers provide a separate statement with the transaction details.
ReplyDeleteI just discovered your articles and they're really helping me make more sense out of my RSUs/tax situation – thank you!
ReplyDeleteI 'm still a little confused about what tax I should see represented on my W-2. Is the following scenario accurate?
Let's assume I have a salary of $100k, of which $40k is withheld for Federal taxes. I also have 1000 RSUs vest, of which 400 are sold to cover (for simplicity's sake I'm assuming cost basis and sale price are $100) at a total of $40k. I sell the remaining 600 shares for $60k. Does that mean in Box 2 of my W-2 I should see the $40k Federal income tax plus the $40k taxes paid on RSUs (Box 2 total $80k)?
Hi JF,
DeleteThank you, I'm glad you found the article helpful.
Box 2 of the W-2 is the total tax withheld for the year. So yes, in your example the total should be $80,000. In reality, the broker will more than likely charge a sales commission, so you will see less.
Actually, I made an error in my scenario above. I incorrectly referenced the $40k paid on salary and RSUs to be Federal, whereas it's actually all taxes (including State, Social Security, etc.). The Box 2 value should be lower than $80k as it's purely Federal income tax.
DeleteThanks again for your clarification, Norman, I think I'm finally getting the hang of this.
Yes, the RSU in treated as wage income, subject to federal tax, Social Security, and Medicare (probably State too). Some statements provided by the employer show the distributions to the various taxing agencies. I avoided putting that level of detail in the article because I was just trying to highlight how to report the transaction.
DeleteOne more question… I received my 1099-B, and there were line items for each sell-to-cover instance, as well as the sales of the remaining shares. Since my company bought and sold the sell-to-cover shares on my behalf and kept the proceeds as tax, do those lines need to be reported on the appropriate forms? (i.e. do I need to enter each line of the 1099-B received and enter cost basis for each, or only enter the lines where the remainder were sold?).
ReplyDeleteEvery sale on your 1099-B should be reported on your tax return.
DeleteGreat, thanks. Really appreciate your help!
Delete