Should I Sell RSUs at a Loss for Tax Purposes?

Restricted Stock Units (RSUs) are a common form of equity compensation, representing a promise to deliver company shares once certain conditions, typically related to time or performance, are met. While RSUs are a valuable component of compensation, their value fluctuates with the company’s stock price. When shares decline after vesting, individuals may consider selling them at a loss. This raises questions about the tax implications, particularly how a loss is recognized and utilized. Understanding these tax rules is important for managing your financial position.

Determining Your RSU Cost Basis

Determining the correct cost basis for Restricted Stock Units is foundational for calculating any gain or loss upon their sale. The cost basis for RSUs is the fair market value (FMV) of the shares on the date they vest. This value is considered ordinary income to the employee at vesting and is included in their W-2 wages. This income recognition effectively means you “paid” for the shares, and that amount becomes your basis.

For example, if 100 RSUs vest when the company’s stock is trading at $50 per share, $5,000 (100 shares x $50/share) is included as ordinary income on your W-2. This $5,000 then becomes your cost basis for those 100 shares. Even if a portion of shares is withheld by your employer for taxes at vesting, the cost basis for the total vested shares is based on their FMV at that time. A Section 83(b) election, which allows for taxing restricted stock at grant, is not permitted for RSUs.

Brokerage firms handling RSU shares sometimes report a cost basis of zero on tax forms like Form 1099-B, which can lead to double taxation if not corrected. This occurs because the firm may not account for the ordinary income already recognized at vesting. Verify that the reported cost basis reflects the fair market value on the vesting date to accurately calculate future gains or losses. Maintaining detailed records of vesting dates and corresponding fair market values is helpful for accurate tax reporting.

Calculating Gains or Losses from RSU Sales

A capital gain or loss is the difference between the sale price of shares and their adjusted cost basis. If the shares are sold for more than their cost basis, a capital gain results. Selling them for less than their cost basis leads to a capital loss.

The holding period for RSUs begins on the vesting date, not the grant date. This distinction is important because it determines whether the gain or loss is considered short-term or long-term. Selling vested RSU shares within one year or less from the vesting date classifies any gain or loss as short-term. Short-term capital gains are taxed at your ordinary income tax rates.

If you hold vested RSU shares for more than one year from the vesting date before selling, any resulting gain or loss is long-term. Long-term capital gains often benefit from preferential tax rates, which are typically lower than ordinary income tax rates. For instance, if you sold 100 shares with a cost basis of $50 per share (total $5,000) for $40 per share (total $4,000) six months after vesting, you would realize a short-term capital loss of $1,000. If you held them for 18 months and sold for $40 per share, it would be a long-term capital loss.

Understanding Capital Loss Limitations

When you incur capital losses from selling investments like Restricted Stock Units, specific rules govern how these losses can reduce your tax liability. Capital losses are first used to offset any capital gains you may have realized during the same tax year. This means that if you have both capital gains and capital losses, the losses will reduce your taxable gains dollar for dollar.

If your total capital losses exceed your total capital gains for the year, you have a net capital loss. Individual taxpayers can deduct a limited amount of this net capital loss against their ordinary income, such as wages or salaries. The maximum deduction against ordinary income is $3,000 per year, or $1,500 for those married filing separately.

Any net capital loss exceeding this annual limit can be carried forward to future tax years indefinitely until fully utilized. When carried forward, losses retain their original character as either short-term or long-term. In subsequent years, these carried-forward losses can again offset capital gains and then, if a net loss remains, up to $3,000 (or $1,500) against ordinary income. For example, if you have a net capital loss of $7,000, you could deduct $3,000 in the current year and carry forward the remaining $4,000 to the next tax year.

Navigating the Wash Sale Rule

The wash sale rule prevents taxpayers from claiming artificial losses for tax purposes without a genuine change in their investment position. This rule disallows a loss on the sale of a security if you purchase, or enter into a contract or option to purchase, the same or a “substantially identical” security within 30 days before or after the sale date. This creates a 61-day window around the sale date (30 days before, the day of sale, and 30 days after). The rule applies to various securities, including stocks, bonds, mutual funds, and exchange-traded funds.

The wash sale rule prevents investors from selling a security solely to realize a tax loss, only to immediately repurchase it and maintain their investment exposure. Without this rule, individuals could continuously sell losing investments at year-end to offset gains or income, then buy them back, effectively manipulating their tax liability. The IRS views such transactions as not representing a true economic loss.

When a wash sale occurs, the disallowed loss is added to the cost basis of the newly acquired substantially identical shares. This adjustment increases the basis of the new shares, which can reduce any future capital gains or increase a future capital loss when those new shares are eventually sold. The holding period of the original shares is also added to the holding period of the newly acquired shares, which can help qualify for long-term capital gains treatment sooner.

For example, if you sell company stock at a $1,000 loss and repurchase shares of the same company’s stock within 30 days, that $1,000 loss is disallowed and added to the cost basis of the new shares. The rule also applies if a spouse buys the substantially identical stock within the 61-day window, or if the repurchase occurs in a retirement account like an IRA. While “substantially identical” is not precisely defined by the IRS, it generally refers to securities considered too similar to be treated as separate investments, such as common stock of the same company.