What Happens If I Sell RSUs at a Loss?

Restricted Stock Units (RSUs) are a form of equity compensation granted by companies to employees. These units represent a promise to deliver company stock or its cash equivalent at a future date, provided certain conditions are met, such as continued employment or performance milestones. While RSUs can be a valuable part of compensation, understanding their tax implications, particularly when their value decreases after vesting, is important. This article explores the specific tax considerations when RSUs are sold for less than their value at the time they became fully owned.

Understanding RSU Taxation Basics

When RSUs are granted, there is generally no immediate tax event for the employee, meaning the promise of future shares does not trigger taxable income. The primary tax event occurs on their vest date, when the employee gains full ownership. The fair market value (FMV) of the vested shares on this date is considered ordinary income. This amount is typically included in the employee’s wages on their Form W-2 and is subject to federal income tax, as well as employment taxes like Social Security and Medicare. The FMV at vesting also establishes the tax basis, or cost basis, for these shares, which is crucial for calculating any future capital gains or losses.

Once shares have vested and their value recognized as ordinary income, they are treated like any other company stock purchased on the open market. When these shares are subsequently sold, the difference between the sale price and their established tax basis determines whether a capital gain or loss has occurred. Capital gains and losses are subject to different tax rules than ordinary income.

Determining Your Capital Loss

A capital loss on the sale of Restricted Stock Units arises when the proceeds received from selling the shares are less than their adjusted cost basis. This occurs when the stock price declines after the RSUs have vested. The calculation for determining a capital loss is: Sale Price – Cost Basis = Capital Gain or Loss.

For RSUs, the cost basis is the fair market value of the shares on the date they vested. For example, if 100 RSU shares vested when the stock price was $50 per share, your cost basis for those shares is $5,000 (100 shares $50/share). If you later sell these 100 shares for $40 per share, your sale proceeds would be $4,000. The resulting capital loss would be $1,000 ($4,000 sale price – $5,000 cost basis).

Brokerage statements, specifically Form 1099-B, report the proceeds from the sale of your RSU shares. However, the cost basis reported on these statements may be inaccurate or listed as zero, often because the brokerage did not receive correct information from the employer. It is important to verify the cost basis using your own records, such as pay stubs or company statements from the vesting date, to ensure accurate tax reporting.

Tax Implications of Capital Losses

Once a capital loss is determined, it can be used to reduce your taxable income. The Internal Revenue Service (IRS) outlines rules for how capital losses can be applied. Capital losses are first used to offset any capital gains realized during the tax year. Short-term capital losses (from assets held for one year or less) first offset short-term capital gains. Long-term capital losses (from assets held for more than one year) first offset long-term capital gains. If losses remain after offsetting gains of the same type, they can then offset gains of the other type.

If your total capital losses exceed your total capital gains for the year, you can deduct a portion of the remaining net capital loss against your ordinary income, such as wages. This deduction is limited to $3,000 per year, or $1,500 if you are married filing separately. Any net capital loss exceeding this annual limit can be carried forward indefinitely to future tax years. This capital loss carryover can be used to offset capital gains in those future years and, if a net loss still remains, to deduct up to the $3,000 ($1,500) limit against ordinary income each year until the loss is fully utilized.

An important consideration when selling shares at a loss is the wash sale rule. This rule disallows a capital loss if you sell securities at a loss and then purchase “substantially identical” securities within 30 days before or after the sale date. The wash sale period spans 61 days (30 days before the sale, the day of the sale, and 30 days after the sale). This rule prevents taxpayers from claiming a tax loss while maintaining continuous ownership of the same investment. If a wash sale occurs, the disallowed loss is added to the cost basis of the newly acquired shares, affecting the calculation of gain or loss when those new shares are eventually sold.

Reporting Your RSU Sale and Loss

Reporting the sale of your Restricted Stock Units, especially when a loss occurs, involves specific IRS forms. The primary document you will receive from your brokerage firm is Form 1099-B, “Proceeds From Broker and Barter Exchange Transactions.” This form details the sale proceeds and may include the cost basis of the shares sold. You should also gather personal records, such as company statements or pay stubs from the RSU vesting dates, to confirm the accurate cost basis for your shares.

The information from your Form 1099-B and verified cost basis is reported on Form 8949, “Sales and Other Dispositions of Capital Assets.” On Form 8949, you will list each sale transaction, including the description of the property, acquisition date (vesting date), sale date, sale proceeds, and correct cost basis. If the cost basis reported on your 1099-B is incorrect, you will need to adjust it on Form 8949. This adjustment typically involves using a specific code, such as “B” if the basis was not reported to the IRS, or “E” if the loss was disallowed due to the wash sale rule.

After completing Form 8949, the totals for your short-term and long-term capital gains and losses are summarized on Schedule D, “Capital Gains and Losses.” Schedule D calculates your net capital gain or loss for the year and is filed with your main income tax return, Form 1040, where rules for offsetting capital gains and deducting capital losses against ordinary income are applied. Given the complexities, particularly with basis adjustments and the wash sale rule, using tax preparation software or consulting a qualified tax professional can help ensure accurate reporting of your RSU sales and any resulting capital losses.