We work with a lot of clients in high-tech and I’ve found there is a common misconception about how Restricted Stock Units (RSUs) are taxed.  Many prospective clients have shared that they are worried about diversification and the consequence of holding onto their employer stock, and tthat they must hold the stock that resulted from RSUs for one year after the vest date in order to avoid being taxed twice.  Given that many of them also work for companies where employees still hold Incentive Stock Options and it is smart to hold those shares for 1 year after exercising, it makes sense that there could be some confusion.  That said, the focus of this post is addressing the misunderstanding of being double taxed on RSUs.

The logic I’ve heard against selling RSU shares when they vest is “I’m taxed when my RSUs vest.  If I turn around and sell those shares, I’m taxed again.  Therefore, I need to hold the shares one year to be able to sell and get capital gains rates.”  At face level, this is all true.  However, there is misunderstanding in what happens in the “I’m taxed again” part of this statement.

When RSU shares vest, an employee receives those shares in stock, minus some shares held back to cover the income tax bill.  The value of the shares shows up as income on the paystub.  The shares held back will also be reflected.

If the employee shareholder then turns around and sells those shares, they will be taxed on the gains.  If held 365 days or less, that tax will be ordinary income, meaning the same as the income earned on a paycheck.  Here’s are the issues:

The gains are calculated based on value at the vesting date and the date the stock is sold.  Gains are not calculated based on the grant price of the RSU shares as taxes were already paid on that gain when the shares vested.

If RSU shares are sold soon after they vest, the stock price may be similar to the price on the vesting date.  If it is similar the tax will be minimal.

If the RSU shares are held for more than one year, they can be sold and the tax rate will be the capital gains rate.  Is that discount worthwhile?  It might be.  The answer is going to depend.  Some of the variables that would help make a determination include:

• How much company stock do you hold already?

• Do you have other equity compensation like Incentive Stock Options or Non-Qualified Stock Options, or an Employee Stock Purchase Plan?

• What other stock are you holding?  Are you heavily concentrated elsewhere?

• What is the risk to you or your family of you holding onto your company stock vs. diversifying?

If you have questions about using your equity compensation to better your financial situation, we’re happy to talk with you.  Contact our office to schedule a time or access our calendar here.