RRestricted stock units (RSUs) grant employees the right to company stock subject to vesting requirements, such as employee performance or vesting. The underlying company stock is not issued until the RSUs vest. When an employee receives restricted stock units, they have an interest in the equity of the company, but the units have no tangible value until they vest. Once an RSU is created, the employee can hold, 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?
When the units vest, the employee receives shares of company stock. Compensation on vested shares is taxed as income. The amount of proceeds is calculated by deducting the cost of the shares from their fair market value (FMV) on the date the shares vest. Generally, there is no cost to the employee to obtain the shares.
FMV of the stock when vested – Cost of shares = Ordinary income
As an example, let’s assume that an employee received 10,000 RSUs for XYZ Company. These units are set 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] His compensation for the current year will be included in the income.
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 RSU vests and the employee owns shares of company stock, the shares can be treated like any other stock and are available to be sold or transferred as the employee wishes.
When is the best time to sell vested RSU shares?
Short answer is it depends. When to sell any investment always depends on the investor’s unique circumstances and financial goals.
Should I sell my vested RSU shares immediately?
A common strategy is to sell the shares as soon as the RSUs vest. There are two advantages to this strategy:
- Normally there is no capital gain. If the shares are sold immediately after vesting, the share price is likely to be equal to the vesting value, meaning there is no capital appreciation that would trigger capital gains tax.
- The sale proceeds become available for reinvestment in a more diversified portfolio. An employee of the company already has exposure to the company’s 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 vested RSU shares gives the employee the flexibility to invest in other strategies to obtain a more diversified portfolio to help achieve their financial goals.
How to sell vested RSU shares
Once the restricted stock units are created, the employee receives shares of company stock in a brokerage account. If the company is publicly traded, selling shares may be as simple as placing a trade order. Note that blackout periods may apply.
Publicly traded companies typically enter blackout periods around corporate events, such as quarterly earnings or fundraising periods. During the blackout period, no new shares may 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 it has vested, the shares are considered capital gains under taxation rules. The difference between the sale price and the cost basis of the stock is taxed as a capital gain or loss. The cost basis of the stock is equal to the FMV of the stock on 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 treated as 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 above example, let’s say the employee waited a week to sell the company shares. Today, the stock price is $6. If the employee sells the 2,500 shares vested last week, they will generate $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 approximately $875.[3],
If employees hold the stock for more than a year before selling the shares, they will 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 have a long-term capital gain of $2,500. If the employee is subject to the 20% long-term capital gains rate, this would result in a capital gains tax of approximately $500.[4],
I hold on to my vested RSU shares, what do I do now?
If you have a concentrated position in one stock, it may be time to think about diversification. You may want to consider your short- and long-term financial goals and assess whether the company’s stock can help you get there. When the company is doing well, you get a chance to participate in it. However, a concentrated position in a company’s stock can harm your wealth-building objectives when the company’s performance doesn’t live up to expectations.
When diversifying into a concentrated position, several factors need to be considered. Risk tolerance, investment characteristics, tax implications and personal financial goals are all part of the equation. We recommend consulting a wealth manager and tax advisor before making a decision.
Disclosure:
Schultz Financial Group, Inc. (“SFG”) is a Registered Investment Advisor with a primary business location in Reno, NV. Registration as an investment advisor is not an approval by securities regulators and does not imply that SFG has attained a certain level of skill, training or competence. SFG does not guarantee the complete accuracy of all data in this article, and should not be considered a complete analysis of the topics 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 a solicitation of SFG or its affiliated investment professionals to provide personal advice or to execute specific securities transactions. Not all services will be suitable or necessary for all customers, and the potential value and benefits of SFG’s services will vary depending on customer’s individual investment, financial and tax circumstances. The effectiveness and potential success of an estate planning, 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 other engaged professionals of the client, and market conditions. . SFG is not a law firm and does not intend any content to be construed as legal advice. Readers should not use this material as the sole basis for any investment, financial planning, tax, legal or other decisions. Rather, SFG recommends that readers consult with SFG and their other professional advisors (including their attorneys and accountants) and consider independent due diligence before implementing any option referred to directly or indirectly 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 made or recommended by SFG, will be profitable or equal to any historical performance level. Additional information about SFG, its services including its Form ADV Part 2A, fees and applicable conflicts of interest and Form CRS is available upon request at 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 here are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.