How to Report RSU Sales on a Tax Return: A Comprehensive Guide

Reporting the sale of Restricted Stock Units (RSUs) on your tax return can seem daunting, but it’s manageable once you understand the core mechanics. The key is to understand that you’re dealing with two potential taxable events: the vesting of the RSUs and the sale of the stock acquired from those RSUs.

Here’s a breakdown of how to report RSU sales on your tax return:

1. Vesting (Compensation Income): When your RSUs vest, the fair market value (FMV) of the shares on the vesting date is treated as ordinary income, just like your salary. This amount is already included in your Form W-2 in Box 1 (Wages, salaries, tips, etc.) and Box 3 (Social security wages) and Box 5 (Medicare wages and tips). The withholding taxes for this ordinary income are also reflected in the same W-2. You don’t directly report the vesting as a separate transaction on Schedule D. Instead, it’s part of your overall income reported from your W-2. The cost basis of the shares acquired is equal to the fair market value that was reported as ordinary income.

2. Sale (Capital Gain or Loss): When you sell the shares acquired from the vested RSUs, you report this on Schedule D (Capital Gains and Losses) of Form 1040. Here’s how:

   • Proceeds: Report the total amount you received from the sale of the stock. This is the sales price.
   • Cost Basis: Your cost basis is the fair market value of the stock on the vesting date. This is the same amount that was reported as ordinary income in your W-2. This is arguably the most important part of reporting your RSU sales.
   • Date Acquired: This is the vesting date (the date the shares became yours).
   • Date Sold: This is the actual date you sold the stock.
   • Gain or Loss: Calculate the difference between the proceeds from the sale and your cost basis. If the sales proceeds are higher than the cost basis, you have a capital gain. If the proceeds are lower, you have a capital loss.

3. Holding Period: Determine your holding period. This is the length of time you held the stock, from the vesting date to the sale date.

   • Short-Term: If you held the stock for one year or less, the gain or loss is considered short-term. Short-term capital gains are taxed at your ordinary income tax rate.
   • Long-Term: If you held the stock for more than one year, the gain or loss is considered long-term. Long-term capital gains are taxed at preferential rates, which are generally lower than ordinary income tax rates.

4. Form 1099-B: You’ll receive Form 1099-B from your brokerage, which summarizes the sales transactions. Use this form to accurately complete Schedule D. While the 1099-B reports the proceeds from the sale, it is your responsibility to make sure the correct cost basis is also reported on Schedule D. Do not blindly enter the information from the 1099-B onto your Schedule D – make sure that the cost basis is accurate. Brokers often don’t have the cost basis of RSUs because they are received as part of an employee compensation plan.

5. Wash Sale Rule: Be aware of the wash sale rule, which disallows a capital loss if you purchase substantially identical stock within 30 days before or after the sale that created the loss. If this applies, you’ll need to adjust your cost basis accordingly.

Frequently Asked Questions (FAQs) about Reporting RSU Sales

What exactly are Restricted Stock Units (RSUs)?

Restricted Stock Units (RSUs) are a form of equity compensation granted by employers to employees. They represent a promise to give the employee shares of company stock once certain conditions are met, usually based on a vesting schedule.

When are RSUs taxed?

RSUs are taxed when they vest, not when they are granted. The fair market value (FMV) of the shares on the vesting date is considered ordinary income and is subject to income tax, Social Security tax, and Medicare tax. The sale of stock is a taxable event as well, subject to capital gains taxes.

What is the cost basis of shares acquired from vested RSUs?

The cost basis of the shares is equal to the fair market value (FMV) of the stock on the vesting date. This is the amount that was reported as ordinary income on your W-2. Remember, this is crucial for calculating any capital gain or loss when you sell the shares.

Where do I find the fair market value of the stock on the vesting date?

Your brokerage statement or your company’s stock plan administrator should provide the FMV on the vesting date. Check your grant details online, or contact your company’s HR or stock administration department if you can’t find this information.

What if I sell my RSU shares immediately after they vest?

If you sell your shares immediately after vesting, your capital gain or loss will be minimal because the sale price will be very close to the fair market value on the vesting date. However, you still need to report the sale on Schedule D. The FMV of the shares will still be considered ordinary income, as if it were salary.

How do I handle taxes on RSUs if I live in a different state than where I work?

Your RSU income is typically taxed in the state where you work at the time of vesting. However, if you’ve moved to a different state between the grant date and the vesting date, you may need to allocate the income between the states based on where you worked during the vesting period. Consult a tax professional for guidance.

What is the difference between short-term and long-term capital gains tax rates?

Short-term capital gains apply to assets held for one year or less and are taxed at your ordinary income tax rates. Long-term capital gains apply to assets held for more than one year and are taxed at preferential rates, which are generally lower than ordinary income tax rates. These rates depend on your taxable income and filing status.

What is the Wash Sale Rule and how does it affect RSU sales?

The Wash Sale Rule prevents you from claiming a capital loss if you sell stock at a loss and then purchase substantially identical stock within 30 days before or after the sale. If this applies, you cannot deduct the loss, and you must add the disallowed loss to the cost basis of the newly acquired shares. This rule can be triggered if you regularly purchase your company’s stock through a dividend reinvestment plan or employee stock purchase plan (ESPP).

How do I report RSU sales if I received Form 1099-B with an incorrect cost basis?

If the Form 1099-B from your brokerage has an incorrect cost basis (which is common with RSUs), you should report the correct cost basis on Schedule D. You may need to include a statement explaining the discrepancy and how you calculated the correct cost basis, attaching it to your tax return. The corrected cost basis will typically be the fair market value of the shares on the vesting date.

Can I donate shares acquired from RSUs to charity?

Yes, you can donate shares acquired from RSUs to a qualified charity. If you itemize deductions, you can generally deduct the fair market value of the stock on the date of the donation as a charitable contribution. If you donate shares held for more than one year, you usually can deduct the fair market value up to 50% of your adjusted gross income (AGI). Consult a tax professional to determine your specific limitations and benefits.

What are some common mistakes to avoid when reporting RSU sales on a tax return?

Common mistakes include:

• Using the wrong cost basis.
• Not reporting the ordinary income recognized at vesting.
• Failing to track holding periods correctly.
• Ignoring the wash sale rule.
• Not reconciling Form 1099-B with your records.
• Forgetting to include the income on your state income tax return.

Should I consult a tax professional regarding my RSU taxes?

Yes, if you’re unsure about any aspect of reporting RSU sales, it’s always best to consult a qualified tax professional. They can provide personalized advice based on your specific situation and help you avoid potential errors or missed opportunities. The complexities of RSU taxation warrant professional guidance, especially if you have a complex tax situation. Remember, accurate reporting is key to avoiding issues with the IRS.