RSU sell to cover taxation

[Parentheses]

I can’t seem to figure out the answer to this question through googling and research so figured I’d ask here.


If you sell to cover taxes on RSU’s vesting, do the shares you sell count as a short term capital gains sale? I thought it did, but a friend told me that was incorrect.

[Wile E. Coyote]

I can’t seem to figure out the answer to this question through googling and research so figured I’d ask here.


If you sell to cover taxes on RSU’s vesting, do the shares you sell count as a short term capital gains sale? I thought it did, but a friend told me that was incorrect.

You will be taxed on the FMV of the RSUs at vesting at ordinary income tax rates and that FMV becomes your basis in those shares.  If you immediately sell some of those shares you are unlikely to have much gain or loss in those shares, but if you do, that would be short term capital gain or loss for the difference between the FMV at vesting and the sale price.

[Paul der Krake]

For all intents and purposes, you should think of it as normal income.

Now teeeechnically, depending on how the exact mechanics of the sale, you may have a very brief holding period between the time the thing becomes yours and the time the trade is executed. Like, if it's sold through a dark pool and the dark pool takes a $10 cut, poof, you'll have a very confusing tax 1099 that says:
Basis: $50,000
Proceeds: $49.990

And you have to deal with an annoying $10 "loss".

But the whole $50,000 should still be included in your gross wages on your W-2.

[Parentheses]

Hmmm…

What I’m trying to confirm is whether it makes sense for me to keep doing what I’ve been doing with my RSU vesting for the taxes taken.

When they are about to vest I’ve been checking with the calculator what the estimated taxes they withhold will be, then I have been selling older long term shares I have to make that money available in the account. I have all of the shares use a cash exercise to pay for the taxes instead of sell to cover because I was assuming selling to cover would be a short term sale and result in a higher tax withholding for those shares vs. selling long term shares.

I mentioned this to a friend who has the same situation as me and he said his accountant told him that’s not true, and that selling to cover doesn’t make those shares sold count as a short term sale.

I’m not really understanding why that would be, but wanted to confirm.

[Wile E. Coyote]

Hmmm…

What I’m trying to confirm is whether it makes sense for me to keep doing what I’ve been doing with my RSU vesting for the taxes taken.

When they are about to vest I’ve been checking with the calculator what the estimated taxes they withhold will be, then I have been selling older long term shares I have to make that money available in the account. I have all of the shares use a cash exercise to pay for the taxes instead of sell to cover because I was assuming selling to cover would be a short term sale and result in a higher tax withholding for those shares vs. selling long term shares.

I mentioned this to a friend who has the same situation as me and he said his accountant told him that’s not true, and that selling to cover doesn’t make those shares sold count as a short term sale.

I’m not really understanding why that would be, but wanted to confirm.

I am not sure I fully understand your facts, but you will be taxed on all shares that vest at ordinary income tax rates.  If you sell some of those shares the moment they vest to cover taxes, there should be no short term gain or loss on those shares.  If, alternatively, you are selling older shares (that have previously vested) to cover the taxes, then you will be triggered short or long term capital gain or loss on those shares depending on how long ago they vested and what your basis in those shares are.

[seattlecyclone]

You'll be taxed at regular income rates on the full value of your shares. That value then becomes your cost basis. Short-term vs. long-term only matters for any gain or loss after vesting. Selling immediately this gain should be nearly zero. The tax rate that applies to a nearly-zero gain is nearly irrelevant.

[Parentheses]

Thanks for talking this through with me everyone that replied, I think I just got it.

Excited I can dump all this money I set aside to pay the taxes with cash into other areas now that I’m not worried about this.

[Car Jack]

This question comes up a lot.  I guess because I used to get options that not only had more complicated tax treatment, but the way they were taxed changed during my working time.  RSUs are simple as pie.  Yes, I get RSUs now and yes, I sell them as absolutely soon as they have been released.

When RSUs are RELEASED (not vested), they are the employer giving you 100% taxable income.  Period.  The end.  There is NO way to get favorable or different tax treatment.  Sure, you can have shares with held to use towards tax, but that's simple some of the income given directly to Uncle Sam, just like some of your regular pay is given to Uncle Sam.

There is NO reason to not immediately sell the RSUs upon their release.  None.  You save zero tax by holding them for 30 days or 30 years.  You owe the income tax regardless.  Sell them and THEN, you can ask yourself......Do I want to buy my company's stock?  If you do, take the money and go to Schwab and transfer that money over and buy however many shares of stock you want to.  Because the company gave you taxable income money in the form of stock.

[Wile E. Coyote]

When RSUs are RELEASED (not vested)...

RSUs do indeed vest.  Not sure what point you are trying to make here.