RSU Vesting & Taxes Question(s)

[little_owl]

Hi, Mustachians!

As part of my compensation package, my employer issues me Restricted Stock Units (RSUs) annually, and each grant vests over 4 years.  I'd like to check my understanding of the taxes associated with these RSUs - I do not employ a tax advisor and am trying to educate myself as best I can. 

My understanding (and some questions):

First, I have to pay ordinary income taxes when the shares vest.  I elect to sell shares upon vesting to pay for those ordinary income taxes, to ensure I don't accidentally under-pay.  My financial institution does this for me.

Next, my assumption is that the cost basis of the shares is based on when they vest (NOT when they are issued to me originally) - is this correct?  Example: Stock was $5 when an RSU grant of 100 shares is issued in Jan 2015.  First vest of 25 shares occurs in Jan 2016, stock price is $8.  My cost basis is $8, not $5.  Rationale is that I didn't actually own the stock in Jan 2015, I just had the promise of future ownership.  Is that correct?

Finally, my assumption is that I need to hold the shares for 1 year, 1 day after VESTING date (not when they are issued to me originally) in order to pay Long-Term Capital Gains (and avoid Short-Term Capital Gains tax).  Same rationale as above.  Example: RSU grant issued Jan 2015, vests in Jan 2016, I have to hold for 366 days beyond January 2016 to pay Long-Term Capital Gains...if I sell before then, I'll pay the higher Short-Term Capital Gains Tax.  Is that correct?

Very much appreciate the advice and checking of these assumptions!  (Anything else I should be asking, but am not?)

Note: I *did* execute a search on these forums (and across the internets) and on MMM Forums found ~6 posts discussing RSUs, which were helpful, including this one:
http://forum.mrmoneymustache.com/ask-a-mustachian/rsus-vesting-soon-not-sure-how-to-proceed/msg716159/#msg716159

[Bikesy]

You're correct on all fronts.  One thing to keep in mind is that you will have very little in cap gains if you're selling the rsu's as they vest.  I also get a large portion of my income via rsu's and I have it set to auto sell as soon as a vest hits.  As far as ordinary taxes, often the brokerage house that holds your rsu's will have different options for taxes as you sell.  Mine is set up to sell all shares.  When the shares sell 25% is automatically withheld for fed income tax.  I also have the option of "cash to cover" taxes where I would get the full value of the stock and pay the taxes at tax time.  Hope that helps.

[little_owl]

@Bikesy THANK YOU for the reply.  I really appreciate it.

You mentioned:
One thing to keep in mind is that you will have very little in cap gains if you're selling the rsu's as they vest.  I also get a large portion of my income via rsu's and I have it set to auto sell as soon as a vest hits.

If you sell the RSU right when it vests, wouldn't you be subject to the higher Short-Term Capital Gains tax?  (Because you don't own the share until it vests to you, so ownership starts at vesting, meaning you only held it for 1 day?)

Regarding ordinary taxes, I have also done the same - my brokerage house sells a certain number of shares to pay for the taxes at that point, which is hugely helpful in terms of keeping the taxes simple for me.

[ZiziPB]

Little-owl, you are correct on all fronts but if you sell on the same day your shares vest, there will be very little tax consequence one way or another because presumably the share price will move very little. 

If you sell the RSU right when it vests, wouldn't you be subject to the higher Short-Term Capital Gains tax?  (Because you don't own the share until it vests to you, so ownership starts at vesting, meaning you only held it for 1 day?)

Yes, but realistically how much profit can you make in a day (barring some unusual event causing a huge price swing)?  It's really irrelevant if you pay $25 or $15 in tax for $100 profit.

[little_owl]

You are geniuses! 

I feel so silly for not even thinking about the fact that the delta (thus, tax) would be so small, so who cares if I pay Long or Short Cap Gains.  Whoo boy, this is what happens when you're sweating all the details - I should have taken a moment to step back and think about that.  :/

[starguru]

I think you are correct in principle but are using the wrong language.  Where you go wrong is using the term "cost basis".  When you look at your 1099 statement for selling vested shares, you will see 0 in the cost basis column.   Looking at mine right now, eTrade reported my full "Gross Proceeds" amount as the full "Realize Gain or Loss" amount, with a bit fat 0 in the "Cost Basis" column.

Don't worry, in effect there is a cost basis but it is called "Ordinary Income Recognized" and shows up, at least on eTrade, as "Adjusted Cost Basis" in the "Gains and Losses" screen.   

The main point I'm trying to make is for RSU sales, you will see a zero cost basis on your 1099.  That's the way it appears to work for me.

[little_owl]

Thank you @starguru - I didn't realize that!  I'll spend some time figuring out what is what - and my first few statements will be helpful, too.

I am very appreciative that I am in this situation, and am fortunate that I have these RSUs as part of my comp, but they aren't the most simple vehicles!

[ZiziPB]

Yes, you will see a zero cost basis reported to IRS because for some reason brokers such as Fidelity (and others, I suspect) do not track and report the cost basis for these types of transactions.  However, when you do your taxes, you will be able to manually insert your cost basis which is the value of the stock at the time it vested.

So it will look something like this:

RSUs with $50K value vested.  $50K reported as ordinary income.  $15K paid in ordinary income tax, FICA, etc.  $35K worth of stock deposited into your brokerage account.  You sell it the next day for $35,100.  You get a 1099 at tax time showing a sale of $35,100 with no basis reported to IRS.  When you do your taxes, you report a sale of stock with $35,100 proceeds and $35K basis, resulting in $100 short term capital gain.

[little_owl]

Thank you ZiziPB!  Got it.

[little_owl]

@bender, I'm REALLY trying to educate myself on the tax code - I am not as informed on the nuances as I'd like to be. 
With that caveat, I've been paying the AMT for several years and don't really know what triggers it precisely.  BUT as I learn more, I will also explore how the RSUs can relate to AMT triggers.

Ugh, taxes!!! ;)

[starguru]

So far as I know AMT is triggered by income.  Since RSU vests are taxed as normal income, they can move you into AMT territory.