Should You Sell Your RSUs Right Away?

Restricted Stock Units (RSUs) are a common component of compensation packages, particularly in the technology sector. They represent a promise from an employer to deliver company stock to an employee once certain conditions are met. While RSUs offer wealth creation potential, they also introduce complexities, especially concerning taxation and investment strategy. Recipients must decide whether to sell these shares immediately upon vesting or to hold them, a choice with various financial and tax implications.

Understanding RSU Vesting and Initial Taxation

Restricted Stock Units are a form of equity compensation where an employee is granted the right to receive company shares, but not actual ownership, until specific criteria are satisfied. This process is known as “vesting.” Vesting typically occurs over a predetermined period, such as several years of continuous employment (time-based vesting), or upon the achievement of certain company or individual performance goals (performance-based vesting). Until RSUs vest, employees cannot sell or transfer them.

When RSUs vest, the fair market value (FMV) of the shares is considered taxable ordinary income. This income is subject to federal, state, and local income taxes, as well as Social Security and Medicare taxes (FICA). For high-income earners, this additional income can push them into a higher tax bracket, increasing their tax burden. Employers typically manage this immediate tax obligation by withholding a portion of vested shares or deducting cash from other compensation to cover taxes, often referred to as a “sell-to-cover” or “net settlement” approach.

The “cost basis” for vested shares is their fair market value on the vesting date. This value is the starting point for determining any future capital gains or losses. For example, if an employee receives 100 shares when the stock price is $50 per share, $5,000 is added to their taxable income, and their cost basis for those 100 shares is also $5,000. This initial taxation and cost basis determination are fundamental to understanding the tax implications of any subsequent sale.

Capital Gains and Losses from RSU Sales

Once RSUs vest and the initial ordinary income tax event occurs, the shares are treated like any other stock purchased through a brokerage account. Any subsequent sale may result in a capital gain or loss, depending on the sale price relative to the established cost basis. A capital gain occurs if shares sell for more than their cost basis; a capital loss occurs if they sell for less.

The tax rate applied to capital gains depends on the holding period after vesting. If shares are sold within one year of vesting, any gain is a short-term capital gain, taxed at the employee’s ordinary income tax rate (typically 10% to 37%). If shares are held for more than one year after vesting, any gain is a long-term capital gain. Long-term capital gains have preferential tax rates, which can be 0%, 15%, or 20% for most taxpayers, depending on income.

Selling shares immediately upon vesting typically results in no capital gain or loss, provided the sale price matches the fair market value on the vesting date. This is because the cost basis matches the sale price. However, holding shares exposes them to market fluctuations, creating the potential for a gain or loss. The wash-sale rule disallows a tax deduction for a capital loss if an investor sells securities at a loss and repurchases substantially identical securities within 30 days before or after the sale. This rule applies across all accounts and can impact claiming losses for tax purposes.

Managing Vested RSU Shares

Managing vested RSU shares involves broader financial planning beyond tax implications. Portfolio diversification is important, as holding a concentrated position in a single company’s stock, especially an employer’s, introduces substantial risk. Diversifying investments across various asset classes and industries helps mitigate risk from a single stock’s performance or market volatility. This strategy helps preserve capital and improve risk-adjusted returns by spreading investments.

Accurate tracking of the cost basis for all vested shares is important for proper tax reporting. The cost basis for RSUs is the fair market value on the vesting date, which is needed for calculating capital gains or losses when shares are sold. While brokerage firms provide tax documentation like Form 1099-B, which reports sale proceeds, they may sometimes show a $0 or blank cost basis for RSUs. Taxpayers must ensure the correct cost basis is reported to avoid overpaying taxes.

Selling vested shares typically involves initiating a transaction through the brokerage account where they are held, similar to selling any other publicly traded stock. Maintaining thorough records of RSU grants, vesting dates, and all sale transactions is necessary for tax compliance. These records, including Form 1099-B and any supplemental information from the brokerage, are needed for accurately completing tax returns. Integrating RSU decisions into an overall financial plan ensures these equity awards support long-term goals, such as retirement savings or significant purchases, aligning compensation with personal financial objectives.