How To Avoid Being Taxed Twice On Your RSU Sales

Posted On: Friday, March 10, 2023

Restricted Stock Units (RSUs) are a form of compensation commonly used by companies to reward their employees

Restricted Stock Units (RSUs) are a form of compensation commonly used by companies to reward their employees. RSUs can be an excellent source of income, but they come with tax implications that can be confusing and frustrating. One of the most significant concerns for RSU holders is the possibility of being taxed twice on their RSU sales. This blog post will explore how to avoid being taxed twice on your RSU sales.

Understanding RSU Taxation RSUs are taxed differently from other forms of compensation. When you receive an RSU grant, you do not immediately own the shares. Instead, you receive the shares at a later date, known as the vesting date. When your RSUs vest, you are taxed on the value of the shares as ordinary income. The value of the shares on the vesting date is added to your W-2 income, and you are taxed at your ordinary income tax rate.

Once your RSUs vest, you have two options: you can sell the shares or hold onto them. If you decide to sell the shares, you will be subject to capital gains taxes. The capital gains tax rate depends on how long you hold the shares before selling them.

The double taxation problem can arise when you sell your RSU shares, because the value at the date of vesting has already been taxed as ordinary income. The value at the date of vesting that has already been taxed as ordinary income creates basis. Capital gains tax, whether short-term or long-term, only needs to be paid on the difference between the share price at the date of vesting and the share price on the date of sale. This can be confusing because each employer reports this information differently and it often needs to be gathered from several different sources.

How to Avoid Double Taxation on RSU Sales

  1. Sell Your Shares Immediately Upon Vesting: If you sell your shares immediately upon vesting, the stock price will equal the price on the date of vesting. Due to there being no appreciation in the share price, no capital gains tax will be due. In practice, this method usually results in a small capital loss after the costs of the sale are factored in.
  2. Take Credit For Your Basis: If you choose to hold onto your shares and sell them at a later date once they have appreciated in value, you will be subject to capital gains tax on the increase in the share price since the vesting date. To ensure that you are only paying capital gains tax on the change in share price, the cost basis of the shares needs to be adjusted for amounts already taxed as ordinary income. 

Partnering with a Tax Professional Can Help You Avoid Double Taxation

RSUs are an increasingly common form of compensation for employees. Still, they come with tax implications that can be confusing and frustrating. Taxation of RSU income and the subsequent sale of shares is a significant concern for many employees. If your compensation package includes RSUs, it’s essential to understand the tax implications and to develop a tax strategy that maximizes your earnings while minimizing your tax burden.

If you want to make sure that you understand your RSU compensation and avoid common mistakes, contact Rakatansky and Associates today!

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