Author Topic: Restricted Stock Units (RSUs)  (Read 2536 times)

pac_NW

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Restricted Stock Units (RSUs)
« on: July 25, 2015, 08:09:21 AM »
On my way to the RE path of FIRE, I decided to have one more work adventure. After a career I startups with stock options, I decided to join a startup division of a large company that offers RSUs. Does anyone have experience with RSUs?  I am interested in the tax implications given you don't have to buy a restricted stock unit like you do with stock options. Appreciate any insights.

seattlecyclone

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Re: Restricted Stock Units (RSUs)
« Reply #1 on: July 25, 2015, 08:44:26 AM »
Yes, I have experience with this. RSUs tend to be a lot simpler tax-wise than stock options. The date your stock vests, the value of that stock on that day counts as W-2 income and is subject to withholding for income and payroll taxes. This value also counts as your cost basis for calculating capital gains. In essence, it's taxed the same as if the company paid you in cash on the vesting day and you then went ahead and used all the cash to buy stock.

Cathy

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Re: Restricted Stock Units (RSUs)
« Reply #2 on: July 25, 2015, 09:59:30 AM »
... a large company that offers RSUs ...

... restricted stock ...

Please note that RSUs are very different from restricted stock.

Restricted stock is stock that you own subject to restrictions on your ownership thereof.

On the other hand, RSUs are not any kind of stock; they are merely a promise, almost always unsecured, to pay you an amount of stock or equivalent cash value at some future point specified in the RSU agreement, if all conditions in the agreement are satisfied. The key thing to understand about RSUs is that you don't own anything (under than any contract rights you might have under the agreement, but the contracts are usually worded so that you don't have many rights); it's just a promise to pay you certain amounts in the future, like a bonus whose value is "determined by the market" as seattlecyclone put it in another thread. The only difference from a cash bonus is that the manner of settlement is in the form of stock (although often the agreement allows the company to make settlement in cash if it elects to do so).

In contrast to RSUs, restricted stock is typically only awarded to high-level executives.
« Last Edit: July 25, 2015, 10:05:56 AM by Cathy »

seattlecyclone

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Re: Restricted Stock Units (RSUs)
« Reply #3 on: July 25, 2015, 10:39:32 AM »
RSU stands for restricted stock unit...seems like the OP was not at all confused about the terminology.

Cathy

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Re: Restricted Stock Units (RSUs)
« Reply #4 on: July 25, 2015, 10:45:02 AM »
RSU stands for restricted stock unit...seems like the OP was not at all confused about the terminology.

Of course RSUs stand for "restricted stock units", but they are very different from "restricted stock". This is really a case of an "unknown unknown". OP was not confused because OP did not know these were different things. However, as OP searches the internet to learn more about the tax properties of these instruments, she or he might not even realise that material that discusses "restricted stock" is discussing something completely different from "restricted stock units", and therefore it is very useful to point out that difference, as I have done in several threads. I speak from experience here; that distinction has confused me in the past.

For example, various IRS publications discuss making an election to include restricted stock in income when it is granted rather than when it vests pursuant to 26 USC 83(b) and subject to the conditions stated therein. This election is available for restricted stock but not for RSUs. There are many other differences between these instruments. It is worth understanding that they are different so as not to be confused when researching this further.

Furthermore, even if OP was already aware that these two things were different, my post may still help other readers who were not aware of that. That said, I don't think OP was aware that an RSU is just a promise to pay an amount in the future, or she or he probably would not have posted this thread, since the tax treatment is the same as a cash bonus and is not novel. Of course, there's nothing wrong with not knowing that; this forum is a place to learn about such things. I am just contending that I did in fact provide useful information.
« Last Edit: July 25, 2015, 10:56:26 AM by Cathy »

pac_NW

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Re: Restricted Stock Units (RSUs)
« Reply #5 on: July 26, 2015, 07:49:05 AM »
Thank you seattlecyclone and Cathy. The answers were helpful as was the Internet to learn the differences between stock options, RSUs, and restricted stock. I like that options and restricted stock have the 83b election - that has helped me in the past with better taxation. It's been interesting to poll folks on when they sell RSUs. With options, I had to wait for a liquidity event. The company I am at is already public so I will have a choice when they vest. Given I have an already diversified portfolio, not sure if I will sell and reinvest elsewhere or let them ride. I have some homework to do.

seattlecyclone

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Re: Restricted Stock Units (RSUs)
« Reply #6 on: July 26, 2015, 10:58:01 AM »
I sell RSUs immediately. By working for my employer I'm already betting that they'll do well enough to keep me on payroll and give me periodic raises until such time as I want to leave on my own terms. Why would I want to double down on that bet by maintaining a significant* equity position in the company?

*By "significant" I'm referring to a fraction of my own net worth. I will never own more than an imperceptible fraction of a percent of my current employer.
« Last Edit: July 26, 2015, 11:01:31 AM by seattlecyclone »