Restricted Stock Units Cost Basis and Its Tax Implications

Restricted stock units (RSUs) can be a complex topic, but understanding the cost basis and tax implications can make all the difference.

The cost basis of RSUs is typically the fair market value of the underlying stock on the date the units are granted, which can be found in the RSU agreement.

This value is used to determine the gain or loss when the RSUs are exercised or sold, and it's also used for tax purposes.

If the RSUs are granted at a discounted price, the cost basis will be the discounted price, not the fair market value.

Additional reading: Basis of Accounting

Tax implications of RSUs are calculated based on the fair market value of the shares at the time of vesting. This is determined by multiplying the number of shares vested by the fair market value per share.

The income tax on RSUs is considered ordinary income and is subject to federal, state, and local tax rates. You'll pay taxes on the cost basis of the shares, which is the market value of the shares on the day they vest.

Worth a look: United States Stock Market History

If you sell your RSUs immediately after vesting, there may be little to no capital gains tax. However, holding the shares and selling them later when the price has appreciated can result in capital gains tax.

The tax liability associated with RSUs requires considering both the income tax at vesting and any capital gains tax if the shares are sold at a higher price later. You'll need to account for the applicable federal, state, and even local tax rates to get a clear picture of the total tax liability.

The amount of tax you owe on RSUs is determined by the fair market value of the shares at the time of vesting. This is calculated by multiplying the number of shares vested by the fair market value per share.

As RSUs vest, the total value of the stock is subject to ordinary income tax in that year. This means that RSUs are subject to the same taxes as your salary, including federal, state, Social Security, and Medicare taxes.

Reporting RSUs can be a complex process, but understanding the basics can help you make informed decisions. If you elect to report your RSUs as ordinary income, you'll have to pay taxes on the full value of the stock at the time of grant, as seen in Sam's situation where he had to report $200,000 as ordinary income.

Holding onto RSUs post-vesting can lead to capital gains or losses, depending on the stock's performance. If you decide to sell your RSUs, you'll be eligible for capital gains treatment, which can be beneficial if you hold the shares for over a year.

The Section 83(b) election can provide tax advantages, but it comes with a significant risk of forfeiture. If you leave the company before the plan becomes vested, you could lose all rights to the stock balance, which can be a substantial financial loss.

Long-term capital gains tax rates are generally lower than short-term rates, making it a good idea to hold onto RSUs for over a year before selling. This can help you minimize your tax liability and keep more of your hard-earned money.

RSUs grant you guaranteed shares after certain conditions are met, whereas stock options give you the opportunity to buy shares at a specified price, also known as the strike price.

Stock options are typically used by early-stage startups or pre-IPO firms, allowing you to buy shares at lower prices, potentially leading to big wins if the company succeeds. This can be a great option for those who believe in the company's potential.

RSUs, on the other hand, are treated as regular income and may be subject to capital gains tax when sold, whereas stock options are treated as regular income until exercised and the underlying stock is sold.

A different take: How to Buy Preferred Stock

RSUs are not identical to stock options. They're actually quite different in terms of how they work.

RSUs are granted to employees for free, whereas stock options give employees the right to purchase company stock at a set price, known as the strike price.

A fresh viewpoint: Stock Price

The value of an RSU only increases after it vests, whereas a stock option is only valuable if the market price exceeds the strike price.

If the market price doesn't exceed the strike price, the stock option is essentially worthless, but an RSU will still be worth something, even if it's not fully vested.

Stock options allow employees to purchase shares in their company's stock at a predetermined price, known as the strike price, during an exercise period.

RSUs, on the other hand, grant guaranteed shares that you receive after certain conditions are met.

Stock options present an opportunity for substantial returns if the company's stock value rises over time, but employees also assume the risk of the stock price not increasing or even declining.

Pre-IPO firms often use stock options, giving employees the option to buy shares at lower prices, which could lead to big wins if the company succeeds.

Stock options are treated as regular income and may only be subject to capital gains tax when they are exercised and the underlying stock is sold, unlike RSUs which can be subject to capital gains tax.

RSUs can be a double-edged sword, offering attractive investment incentives but also presenting complex tax implications. You'll pay taxes on the market value of the shares when they vest.

The cost basis of the shares will largely determine your tax burden, so it's essential to consider this when devising your overall tax-planning strategy. Timing the sale of RSU shares post-vesting can significantly impact the amount of capital gains tax you incur.

If you sell the shares immediately upon vesting, there may be little to no capital gains tax, but holding the shares and selling them later can result in capital gains tax. You'll need to balance potential stock appreciation with tax impact, taking into account your risk tolerance, financial goals, and market outlook.

Engaging a tax professional who is well-versed in the taxation of RSUs can provide invaluable insights and help you structure a tax-efficient strategy. They can guide you on optimizing the timing of selling shares, estimating tax liability, and offering advice on tax withholding and payment of estimated taxes.

Professional advice is crucial in navigating the intricate tax rules surrounding RSUs, helping you avoid costly mistakes and optimize tax efficiency. By understanding the tax implications and planning strategically, you can make the most out of your RSUs while minimizing the tax burden.

RSUs are particularly beneficial for companies with employees who may not have the financial means to exercise stock options.

Late-stage start-ups and public companies can also benefit from using RSUs, as they don't dilute existing shareholders like stock options do.

Employees don't need to take any action to obtain stock with RSUs, they receive it automatically when vesting conditions are met.

This ease of access and lack of upfront financial commitment can be especially beneficial for employees who may not have the financial means to exercise stock options.

For another approach, see: Stifel Financial Stock Price

You might be worried that you were double-taxed in previous years.

If you see a $0 basis on your 1099-B, that should be a red flag.

Any time you see a $0 cost basis on your 1099-B, it's a sign to investigate further with your financial planner and tax professional.

Pull up any previous tax return or two, and scroll down until you see Form 8949.

For another approach, see: Espp Adjusted Cost Basis

If you were double taxed, consider getting a tax professional to help you amend the return, which might result in thousands of dollars back in your pocket.

You should investigate further with your financial planner and tax professional if you see a $0 basis on your 1099-B.

Having a tax professional can help you avoid the mistake of double-taxing your RSU income.