Let’s consider Jill, who becomes an employee of XYZ Company in June 2018 and is awarded 1,000 RSUs, which are put on a 5-year vesting schedule with yearly cliffs. Jill isn’t required to pay any money to acquire the RSUs.
On her one-year work anniversary, 200 of Jill’s RSUs vest. Jill exchanges the 200 RSUs for 200 actual shares of stock. On her two-year work anniversary, another 200 RSUs vest, which Jill exchanges for 200 actual shares of stock. Another 200 RSUs will vest in years 3, 4 and 5 and exchanged for stock until all 1,000 RSUs are converted to 1,000 shares of stock.
How RSUs are taxed:
Let’s assume XYZ Company’s stock is valued at $30 per share when Jill’s first 200 RSUs vest in June 2019. The total value of Jill’s 200 shares of stock is therefore $6,000 ($30 per share x 200 shares). This $6,000 is added to Jill’s Form W-2 as wages, which is subject to income, Social Security and Medicare taxes.
Let’s see what Jill’s tax calculation looks during the 5-year vesting period, assuming that the price per share increases $5 each year:
2019: 200 shares @ $30 = $6,000 included in Jill’s Form W-2
2020: 200 shares @ $35 = $7,000 included in Jill’s Form W-2
2021: 200 shares @ $40 = $8,000 included in Jill’s Form W-2
2022: 200 shares @ $45 = $9,000 included in Jill’s Form W-2
2023: 200 shares @ $50 = $10,000 included in Jill’s Form W-2
Total vested shares: 1,000
Total income included in Jill’s Form W-2 over 5 years: $40,000
Sale of RSU Stock:
Continuing our example, once the RSUs are converted to stock, Jill can either sell the stock right away or hold the stock and sell it at a later date. Here are Jill’s choices for selling her stock:
- Jill immediately sells her stock immediately after vesting – i.e. Jill receives stock for $30 a share and sells it for $30 a share. No gain or loss is recognized.
- Jill sells her stock within one year after vesting. Jill will report any gains as ordinary income and any loss as a short-term capital loss.
- Jill sells her stock more than one year after vesting. Jill will report any gains as a long-term capital gain and any loss as a long-term capital loss.