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Commentary & Insights

Insight, Stock Options

How to Sell RSUs and Pay No Additional Taxes!

16 May 2022
Ferreria, Marshall, Rabuck

By: Joe Ferreira, Sam Marshall, Jack Rabuck

The world of corporate stock and stock options can be confusing and full of jargon. One such piece of jargon is the acronym “RSU,” short for “Restricted Stock Unit.”

If you receive RSUs as part of your compensation, we have good news! Compared to other kinds of equity compensation, RSUs have many distinct advantages. This article will address a few key components of RSUs to help you make informed decisions with your stock.

What is an RSU?

RSUs are fundamentally different from other kinds of equity compensation like Incentive Stock Options (ISOs) and Non-qualified Stock Options (NQSOs). With stock options, you are granted shares and given the “option” to purchase those shares at a pre-determined price (commonly known as your strike price or grant price). RSUs don’t feature this optionality component. Instead, you are given the shares at no cost, subject to a vesting schedule. RSUs— and this is the “restricted” bit—will vest over time, often on a quarterly, semiannual, or annual basis. 

Should you leave the company before the units vest, you lose them, but once they vest, they are yours! At vesting, the RSUs are no longer restricted and are simply stock of the company, which you now own. Note: there may still be some restrictions on the stock. It is common that employees can only sell vested RSUs during certain pre-approved time periods or with pre-approved plans.

This means it is relatively simple to figure out what your RSUs will be worth—much simpler than with the aforementioned types of options. You can simply multiply the number of shares about to vest by the current value of the stock. RSUs are most commonly used with publicly traded companies, so this is usually a simple matter. With private companies, some other RSU valuation method would need to be used.

Taxes at Vesting

When shares vest, they are treated as income. If you vest 1,000 shares of company stock that is trading at $100/share, you will have an additional $100K in taxable ordinary income for that year. It is very common for there to be an automatic sale and remittance of tax withholding upon vesting. In the above example, it might look like this: the 1,000 shares vest for $100K, 300 are sold immediately, creating $30K of cash, which is then sent to the IRS (see figure 1). The employee would then see 700 shares of stock (sometimes still listed as “vested RSUs”) in their account. As a side note, we often see that these automatic tax plans under-withhold both at the federal and state levels.

 How to sell RSUs and Pay no Tax

Figure 1: example of use of proceeds with automatic sale for tax withholding

Taxless Sales of RSUs

A beneficial strategy is to sell your RSUs right after they vest. As this ensures there is little time for a taxable capital gain to accrue, you will not owe any capital gains taxes. You will simply owe the ordinary income tax on the vested amount of your RSUs. 

There is essentially no tax penalty to selling the RSUs at that point—in either case, you will owe income taxes on the amount that vested and no more. In fact, holding the RSUs rather than selling them puts you in the same position as if you received a cash bonus and used it entirely to buy company stock!

This trick can be used even if you have accumulated many shares of vested RSUs over the years —you simply need to make sure that any RSUs you sell (for whatever purpose) are the ones which just vested. Depending on where your shares are held (“the custodian”) this may be easier or harder to specify, but it should always be possible.

Of course, depending on how you feel about your company, you may wish to accumulate shares, but hopefully, now that you know this trick, you can avoid accidentally having too much stock in just one company.