Restricted Stock Units (RSUs) provide employees the right to own company stock subject to vesting requirements, such as employee performance or the passage of time. The underlying company stock is not issued until the RSUs vest. When an employee receives Restricted Stock Units, they have an interest in the company’s equity, but the units have no tangible value until they vest. Once the RSUs vest, the employee can keep, sell, or transfer the shares, just like any other stock. Companies use RSUs as a form of employee compensation or bonus.
How are RSUs taxed?
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When the units vest, an employee receives shares of the company’s stock. The vested shares are taxed as compensation income. The amount of income is calculated by subtracting the cost of the shares from their fair market value (FMV) on the date the shares vested. Typically, there is no cost to the employee to receive the shares.
FMV of stock at vesting – cost of shares = ordinary income
As an example, let’s say that an employee received 10,000 RSUs for XYZ Company. These units are scheduled to vest 25% each year over the next four years. XYZ is a publicly traded company and is currently trading at $5 per share. Today, an employee had 2,500 shares vest. There was no cost to exercise, so $12,500[1] will be included in their compensation income for the current year.
Can you sell Restricted Stock Units?
Restricted Stock Units cannot be sold or transferred while they are subject to forfeiture. This means that the employee cannot sell or transfer the units until they are vested. However, once the RSUs vest and the employee has shares of company stock, the shares can be treated like any other stock and are available to sell or transfer as the employee wishes.
When is the best time to sell vested RSU shares?
The short answer is it depends. When to sell any investment always depends on the investor’s unique circumstances and financial goals.
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Should I sell my vested RSU shares right away?
A common strategy is to sell the shares as soon as the RSUs vest. Two benefits to this strategy are:
- There are usually little to no capital gains ramifications. If the shares are sold immediately after vesting, the share price will likely be about equal to the vesting price meaning there is little to no capital appreciation that will trigger capital gains tax.
- The sale proceeds become available for reinvestment in a more diversified portfolio. An employee of a company already has exposure to company risk: the employee’s salary is paid by the company, they receive RSUs, and they may also receive other forms of equity compensation such as stock options. Selling the vested RSU shares lets the employee invest in other strategies to achieve a more diversified portfolio to help achieve their financial goals.
How to sell vested RSU shares
Once the Restricted Stock Units vest, the employee receives shares of the company stock in a brokerage account. If the company is publicly traded, selling the shares can be as simple as placing a trade order. Note that blackout periods may apply.
Publicly traded companies commonly enter blackout periods around corporate events, such as quarterly earnings or fundraising periods. During the blackout period, no new shares can be issued and employees are unable to exercise stock options or sell shares of company stock.
Tax implications of selling shares
If the stock is sold after vesting has occurred, the shares are treated under capital gains taxation rules. The difference between the sale price and the cost basis of the stock is taxed as either a capital gain or loss. The stock’s cost basis is equal to the FMV of the stock at the date of vesting plus any reinvested dividends or additions. If the shares are held for more than one year from the vesting date, any capital gain or loss will be considered long-term. If the shares are held for one year or less, any capital gain or loss will be considered short-term.
To continue the example from above, let’s assume the employee waited one week to sell the shares of company stock. Today, the stock price is $6. If the employee sells the 2,500 shares that vested last week, they will generate a $2,500[2] short-term capital gain. If the employee is in the 35% tax bracket, this would result in a capital gains tax of about $875[3].
If the employee held the stock for more than one year prior to selling the shares, they would benefit from preferential capital gains tax rates of 15% or 20%. If the 2,500 shares were held for one year and one week and sold for $6 per share, the employee would generate a $2,500 long-term capital gain. If the employee is subject to the 20% long-term capital gains rate, this would result in a capital gains tax of about $500[4].
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I have been holding on to my vested RSU shares, now what do I do?
If you have a concentrated position in a single stock, it may be time to start thinking about diversification. You may want to consider your short- and long-term financial goals and assess whether the company stock can help you get there. When the company is performing well, you get to participate in that upside. However, when the company’s performance doesn’t meet expectations, having a concentrated position in the company’s stock could harm your wealth-building objectives.
When diversifying a concentrated position, many factors need to be considered. Risk tolerance, investment characteristics, tax ramifications, and personal financial goals are all part of the equation. We recommend consulting with a wealth manager and a tax advisor before making a decision.
Disclosure:
Schultz Financial Group, Inc. (“SFG”) is a registered investment adviser with a primary business location in Reno, NV. Registration as an investment adviser is not an endorsement by securities regulators and does not imply that SFG has attained a certain level of skill, training, or ability. SFG does not guarantee the complete accuracy of all data in this article, and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of SFG as of the date of publication and are subject to change. This article does not constitute personalized advice from SFG or its affiliated investment professionals, or a solicitation to execute specific securities transactions. Not all services will be appropriate or necessary for all clients, and the potential value and benefit of the SFG’s services will vary based upon the client’s individual investment, financial, and tax circumstances. The effectiveness and potential success of an estate plan, tax strategy, investment strategy, and financial plan depends on a variety of factors, including but not limited to the manner and timing of implementation, coordination with the client and the client’s other engaged professionals, and market conditions. SFG is not a law firm and does not intend for any content to be construed as legal advice. Readers should not use any of this content as the sole basis for any investment, financial planning, tax, legal or other decisions. Rather, SFG recommends that readers consult SFG and their other professional advisers (including their lawyers and accountants) and consider independent due diligence before implementing any of the options directly or indirectly referenced in this blog post. Past performance does not guarantee future results. All investment strategies have the potential for profit or loss, and different investments and types of investments involve varying degrees of risk. There can be no assurance that the future performance of any specific investment or investment strategy, including those undertaken or recommended by SFG, will be profitable or equal any historical performance level. Additional information about SFG, including its Form ADV Part 2A describing its services, fees, and applicable conflicts of interest and Form CRS is available upon request and at https://adviserinfo.sec.gov/firm/summary/108724.
[1] $5 x 2,500 = $12,500
[2] ($6-$5) x 2,500 = $2,500
[3] $2,500 x 35% = $875
[4] $2,500 x 20% = $500
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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