How Does RSU Vesting Trigger a Wash Sale?

Restricted Stock Units (RSUs) are a form of employee compensation that grants you company stock as it vests over time, with the value taxed as ordinary income. Separately, the wash sale rule is an IRS regulation addressing the sale and repurchase of securities. The interaction between these two concepts can create a complex tax situation, as the vesting of RSUs can unintentionally trigger the wash sale rule and lead to specific tax consequences.

Understanding the Wash Sale Rule

The wash sale rule prevents taxpayers from claiming a tax deduction for selling a security at a loss and immediately buying it back. According to Internal Revenue Code Section 1091, this rule applies to stocks, bonds, and options. It is triggered when you sell a security at a loss and acquire a “substantially identical” one within a 61-day period, which includes the 30 days before the sale, the day of the sale, and the 30 days after.

For example, if you buy 100 shares for $10,000 and later sell them for $8,000, you have a $2,000 capital loss. If you buy back 100 shares of the same company within 30 days, the wash sale rule is triggered. The rule does not permanently eliminate the tax benefit of the $2,000 loss. Instead, the loss is disallowed for the current tax year and added to the cost basis of the newly purchased shares.

Your cost basis for the new shares would be their purchase price plus the $2,000 disallowed loss, deferring the tax benefit until you sell them. Additionally, the holding period of the original shares that were sold at a loss also transfers to the new shares.

How RSU Vesting Triggers a Wash Sale

The connection between RSUs and the wash sale rule is how the IRS views a vesting event. For wash sale purposes, the IRS considers RSU vesting an acquisition or “purchase” of shares. If you sell company stock at a loss around the same time your RSUs vest, you can trigger the rule even though you did not actively buy shares on the open market.

For example, an employee sells 200 shares of company stock on May 1st for $50 per share. With an original cost basis of $60 per share, this sale results in a $2,000 capital loss. On May 15th, 100 of the employee’s RSUs vest when the stock’s fair market value is $52 per share.

Because these 100 shares were acquired (vested) within 30 days of selling company stock at a loss, the wash sale rule applies to those 100 shares. The loss associated with 100 of the sold shares is disallowed, which amounts to a $1,000 disallowed loss ($10 loss/share 100 shares). The remaining $1,000 loss from the other 100 shares sold can still be claimed.

Calculating and Reporting the Adjusted Cost Basis

After a wash sale from RSU vesting, you must calculate the adjusted cost basis for the newly acquired shares. To do this, add the disallowed loss amount to the fair market value of the vested RSUs on their vesting date. This new, higher basis reduces the taxable capital gain when you eventually sell these shares.

In the previous example, the 100 vested shares had a fair market value of $5,200. The disallowed loss was $1,000. The adjusted cost basis for this block of shares becomes $6,200 ($5,200 + $1,000), or $62 per share, which is the figure used for future capital gains calculations.

Brokerage firms often do not make this adjustment on the Form 1099-B they issue. While the broker reports the vesting as ordinary income, it is unaware of the separate sale that triggered the wash sale. The responsibility falls on the taxpayer to identify the wash sale and report it correctly to the IRS.

You must use Form 8949, “Sales and Other Dispositions of Capital Assets,” to report the adjustment. When reporting the original sale that generated the loss, you enter code ‘W’ in column (f) to indicate a wash sale. In column (g), you enter the amount of the disallowed loss as a positive number. This adjustment ensures your tax return accurately reflects that the loss is not currently deductible.

Common Scenarios and Tax Planning

A common way employees trigger a wash sale involves “sell-to-cover” transactions. When RSUs vest, their value is taxable income, and companies often automatically sell a portion of the shares to cover tax withholding. This automatic sale, combined with the acquisition of the remaining vested shares, can create a wash sale if you sold other company shares at a loss within the 30-day window. The automatic nature of this process makes it easy to overlook.

For instance, if you sold company stock at a loss and your RSUs vest 15 days later, a sell-to-cover transaction occurs. The acquisition of the net shares you receive is the “purchase” that looks back to your recent sale. This triggers the wash sale rule and disallows the prior loss.

The primary strategy to avoid this is to be mindful of your RSU vesting schedule. Before selling company stock at a loss, check if any RSUs will vest within the 61-day wash sale window. If a vesting date is near, you can avoid the wash sale by delaying your sale until more than 30 days after the vest.

Another strategy is to sell shares that have a capital gain if you need to liquidate stock near a vesting date. The wash sale rule only applies to losses. Selling shares for a profit will not trigger a disallowance, regardless of when your RSUs vest. By planning your transactions around your vesting dates, you can manage your tax liability.