When you’ve got stock in a company, it’s normally a really, really good thing.
Especially RSUs (or restricted stock units). They’re stock you get just by working in a company…. Ones you don’t even have to pay for.
And any time those RSU shares “vest”—meaning the company hands ownership of them over to you—you become a wealthier individual.
Cha-ching! ????
But then… of course… as is with any form of “income,” the IRS wants their share too.
Which is why you so often hear the term “cost basis” associated with RSUs or simply RSU cost basis. Since you don’t actually have to pay for these shares, this is what the IRS uses to assess their value, so they can figure out their worth… and therefore know how much tax you owe on them.
(Sometimes it’s also called tax basis… because it’s what’s used to figure out taxes.)
And most often, cost basis is the purchase price of an investment. Or, if we’re talking about RSU cost basis the market price that they were on the day they vested.
How RSUs Are Normally Granted
In most RSU agreements, you get a grant of RSUs expressed as a set dollar amount.
So if your company grants you a $400,000 total value and the shares of your company are worth $10 each at the time of grant, that means you’re granted 40,000 shares.
But, you probably have a vesting schedule divided up over the course of four years, that means you get 10,000 shares per year. (Or a $100,000 value each year.)
RSU Cost Basis: Why Your Vested Shares Cost You Money at Tax Time
However, since your vested RSUs are granted to you and you don’t have to pay for them, they’re considered income when they vest, rather than an investment expense.
So, if you vested 10,000 shares at $10 each, that’s $100,000 of value you received, which means that money will be taxed like ordinary income, just like your salary and your bonuses.
And this is really important to keep in mind, because most likely, your company won’t withhold enough to cover the extra amount you’ll owe in taxes. (Typically, for example, tech companies sell enough shares to withhold 22% for federal taxes and 10% for state taxes. However, a lot of tech company employees are in a higher federal tax bracket than 22%, meaning you’d owe more than what your company set aside… and you’ll have to pay it out of your pocket.)
So for all intents and purposes: go ahead an expect that any vested RSUs will cost you money come tax time in April.
Update: RSU Withholding in 2024
Many companies have recognized that the standard Federal withholding of 22% is creating a real problem for their employees with RSU. You may be able to elect a higher supplemental wage withholding rate to avoid a huge tax bill next April.
Consult your advisor. We more often than not have our clients elect a higher, voluntary withholding rate on their RSU.
Future Taxes on Vested RSUs (Why Cost Basis is So Important)
Now that the vested shares are your property, the cost basis (or market price on the day of vesting) comes into play in figuring out the taxes you’ll owe on them in the future.
So, if the price of the shares goes up, the difference between the cost basis and the current increased price will be considered a capital gain, and that’s what you’ll be taxed on when you sell the shares. (However, if you hold onto these without selling for more than a year, the gain is taxed at a long-term capital gains rate, which is lower than ordinary income taxes.)
But, if the price goes down, it’s considered a capital loss (even if you didn’t pay for the shares in the first place). And if you’re registering a capital loss with these shares, they can be used to offset your capital gains in other investments…. Or reduce your ordinary, taxable income by up to $3,000 per year.
Do You Ever Need to Adjust Your Cost Basis?
The short answer. No. But, wait there’s more. Read ahead to learn how missing, unreported RSU cost basis is a really big issue.
Sometimes people get confused about this, because there are so many moving parts to taxes, especially when you’re talking about RSU and income tax and shares and capital gains…
But no, you should never need to adjust your cost basis for RSU shares. (Unless we’re talking about Alternative Minimum Tax, and that’s a separate conversation.)
In fact, the cost basis and RSU rules are incredibly straightforward: it’s the price the shares cost for normal market buyers the day they vested into your name. That’s it. And since that piece of information will never change, you’ll never need to adjust your cost basis for regular tax calculations.
But one thing you should watch out for when filing your taxes is if your cost basis isn’t reported, or if there’s a missing cost basis anywhere. It’s more common than you think, so make sure you’re careful.
Before you file, double-check that the income from your vested RSUs reported on your W2 matches the cost basis on your Form 1099-B.
(But if you accidentally didn’t include that Form 1099-B, you may get a CP200 notice from the IRS saying you owe them more money. But don’t worry – these are almost never as scary as they seem at first.)
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Double-Trigger RSUs During an IPO & Cost Basis
Double-trigger RSUs during an IPO are particularly interesting when it comes to cost basis, though.
The reason is, these shares “vest” for you over time as you work for the company, but they don’t actually vest until the IPO happens.
So, if you get 10,000 shares per year, but work for the company for three years before an IPO happens, that’s 30,000 shares potentially vesting all at once. ???? Yeah. Talk about a tax bill.
The thing is, these shares might vest immediately on the IPO date, or it may happen at a later date… check your RSU Grant Agreement to figure out when this is. (Knowing it will help you predict cost basis and plan your tax strategy for April.)
If there’s nothing there, you may get an email once the IPO is announced to let you know when it will happen, so you can have a better idea of what the cost basis of these shares will be.
But regardless, the cost basis remains the same: it’s the market price of the shares on the exact day they vest to you.
Making RSU and Cost Basis Easy to Manage… And Selling for Profit
Knowing that your cost basis for each set of vested RSUs will never change can really take a huge burden off your plate.
But since most people will have multiple vest dates for their RSUs, that can be something that gets confusing when it comes time to file your taxes… especially if you’ve had more than one set of shares vest to you under your RSU agreement.
Plus, there’s all the calculations to do about keeping or selling your shares… and whether they’re calculated as normal income or as long-term capital gains.
If you’d like some help figuring out what the cost basis of your vested RSUs will mean for you at tax time…. And some guidance on how to reduce that tax bill, get in touch for a consultation with one of our IPO and stock tax experts.
