Understanding Restricted Stock Units (RSU)

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icedtea
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Understanding Restricted Stock Units (RSU)

Post by icedtea » Fri Jul 20, 2018 4:05 pm

I was offered 4000 shares of RSUs at my job. When I started the job, the shares were worth $17. The current ticker price is $21. The shares vest at a rate of 1/4th on each of the first, second, third and fourth anniversaries of my start date. I've been there for 9.5 months.

I am not sure I want to stay at the job beyond a year. If the stock price was $23 on my 1 year anniversary and that day I decided to sell the stock, how would my payout be calculated? Trying to understand if I would get $23x1000 shares or (23-17)x1000. And would I just pay long term capital gains tax?

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mhc
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Re: Understanding Restricted Stock Units (RSU)

Post by mhc » Fri Jul 20, 2018 4:15 pm

When shares vest, the fair market value (FMV) of the shares is counted as wages. You don't have to do anything out of the ordinary. Once you have the shares, they follow normal tax rules for stocks with a cost basis equal to the FMV when they vest.

Before the shares vest you have to instruct the brokerage on how to handle the vesting because taxes are due immediately. The most common method is to withhold shares to cover the tax. You will then get the remaining shares. I recommend selling the remaing shares immediately which will incur a small short term cap gain/loss.

icedtea
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Re: Understanding Restricted Stock Units (RSU)

Post by icedtea » Fri Jul 20, 2018 4:30 pm

mhc wrote:
Fri Jul 20, 2018 4:15 pm
When shares vest, the fair market value (FMV) of the shares is counted as wages. You don't have to do anything out of the ordinary. Once you have the shares, they follow normal tax rules for stocks with a cost basis equal to the FMV when they vest.

Before the shares vest you have to instruct the brokerage on how to handle the vesting because taxes are due immediately. The most common method is to withhold shares to cover the tax. You will then get the remaining shares. I recommend selling the remaing shares immediately which will incur a small short term cap gain/loss.
Thanks. So would the calculation for this scenario be correct?

Scenario: $23 per share on 1 year vesting date
Receive 1/4 of shares - 1000 shares
1000x23=23000 - income tax (assume 32% for me) = $15640
Sell shares on vesting date to incur small gain/loss, end up with roughly $15640 give/take.

MotoTrojan
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Re: Understanding Restricted Stock Units (RSU)

Post by MotoTrojan » Fri Jul 20, 2018 5:06 pm

icedtea wrote:
Fri Jul 20, 2018 4:30 pm
mhc wrote:
Fri Jul 20, 2018 4:15 pm
When shares vest, the fair market value (FMV) of the shares is counted as wages. You don't have to do anything out of the ordinary. Once you have the shares, they follow normal tax rules for stocks with a cost basis equal to the FMV when they vest.

Before the shares vest you have to instruct the brokerage on how to handle the vesting because taxes are due immediately. The most common method is to withhold shares to cover the tax. You will then get the remaining shares. I recommend selling the remaing shares immediately which will incur a small short term cap gain/loss.
Thanks. So would the calculation for this scenario be correct?

Scenario: $23 per share on 1 year vesting date
Receive 1/4 of shares - 1000 shares
1000x23=23000 - income tax (assume 32% for me) = $15640
Sell shares on vesting date to incur small gain/loss, end up with roughly $15640 give/take.
Yup, if they are RSUs and not options that is exactly how it works. Certainly seems worth staying another 2.5 months if that is when you'll get it.

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cockersx3
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Re: Understanding Restricted Stock Units (RSU)

Post by cockersx3 » Fri Jul 20, 2018 6:22 pm

MotoTrojan wrote:
Fri Jul 20, 2018 5:06 pm
icedtea wrote:
Fri Jul 20, 2018 4:30 pm
mhc wrote:
Fri Jul 20, 2018 4:15 pm
When shares vest, the fair market value (FMV) of the shares is counted as wages. You don't have to do anything out of the ordinary. Once you have the shares, they follow normal tax rules for stocks with a cost basis equal to the FMV when they vest.

Before the shares vest you have to instruct the brokerage on how to handle the vesting because taxes are due immediately. The most common method is to withhold shares to cover the tax. You will then get the remaining shares. I recommend selling the remaing shares immediately which will incur a small short term cap gain/loss.
Thanks. So would the calculation for this scenario be correct?

Scenario: $23 per share on 1 year vesting date
Receive 1/4 of shares - 1000 shares
1000x23=23000 - income tax (assume 32% for me) = $15640
Sell shares on vesting date to incur small gain/loss, end up with roughly $15640 give/take.
Yup, if they are RSUs and not options that is exactly how it works. Certainly seems worth staying another 2.5 months if that is when you'll get it.
I agree, sort of.

For RSU's that I have received in my career, the company usually sells a portion of the shares you receive to cover the taxes. Not sure if this is what everybody does, but it has been my experience. So in the OP's example, when the RSU's vest I suspect OP will likely receive approx 680 vested shares with a cost basis of $23. The other 320 shares would have been sold to pay the 32% tax on the 1000 original shares. OP would then sell the remaining shares and receive 680 x 23 = $15640, less any transaction fees incurred by the brokerage during the sale. So same amount overall, just a different way to get there.

Note that, in my experience, the original value of the vested RSU's ($23,000) and the taxes paid when the RSU's vested (by selling shares) will be included in the OP's W-2 from the employer, if it is similar to my experience. I believe the taxes paid include payroll taxes as well (ie FICA, medicare, etc) as well as normal income taxes, but not 100% certain.

If the OP doesn't sell on the day of vesting, OP will receive whatever 680 shares of that stock is worth at that point. OP will then have to report capital gains on 680 x ((Share price at date of sale) - $23) assuming the cost went up after vesting. Otherwise it's a loss from the $23 basis.

Hope this makes sense!

Jack FFR1846
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Re: Understanding Restricted Stock Units (RSU)

Post by Jack FFR1846 » Fri Jul 20, 2018 7:56 pm

You have the option to receive the shares and hold, transfer them as you please, or sell all on vest, which gives you all the proceeds with no taxes with held or to sell on vest with shares with held for tax, which is described in several above posts. If you sell all on vest, you may want to send an estimated tax payment or change normal tax with holding so you don't underpay by a lot.
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diy60
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Re: Understanding Restricted Stock Units (RSU)

Post by diy60 » Fri Jul 20, 2018 8:39 pm

icedtea wrote:
Fri Jul 20, 2018 4:05 pm
I am not sure I want to stay at the job beyond a year.
Not sure if this would be a deciding factor to leave, but you should check if you forfeit any unvested shares due to separation from service. At my employer all unvested RSUs were forfeited for anything other than retirement or death. If so in your case, you'll forfeit a potential of $60K.

Also, as others have stated, vested amounts will show up as income on your W2 in the year they vest.

downshiftme
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Re: Understanding Restricted Stock Units (RSU)

Post by downshiftme » Fri Jul 20, 2018 9:14 pm

What happens with RSU in an not-yet-public company. There doesn't seem to be any way to sell shares to cover taxes. How does that work?

Sportswhiz00
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Re: Understanding Restricted Stock Units (RSU)

Post by Sportswhiz00 » Fri Jul 20, 2018 9:32 pm

downshiftme wrote:
Fri Jul 20, 2018 9:14 pm
What happens with RSU in an not-yet-public company. There doesn't seem to be any way to sell shares to cover taxes. How does that work?
have to check your award agreement. There should be a tax or withholding section. Most likely it says that if you do not write a check to the company to pay the taxes, the company will automatically withhold shares to pay taxes (very similar to a public company, except that in a public company a third party is buying the shares you sell to pay taxes whereas in a private company the company is effectively buying the shares).

You also should check your award agreement to determine when you receive the shares, and whether you receive cash or stock. Because you have RSUs, it’s possible that after you vest you may get a cash payout equal to the value of stock at the time instead of getting the actual shares.

Anyway this is all company by company, so gotta read the docs.

icedtea
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Re: Understanding Restricted Stock Units (RSU)

Post by icedtea » Sat Jul 21, 2018 10:13 am

diy60 wrote:
Fri Jul 20, 2018 8:39 pm
icedtea wrote:
Fri Jul 20, 2018 4:05 pm
I am not sure I want to stay at the job beyond a year.
Not sure if this would be a deciding factor to leave, but you should check if you forfeit any unvested shares due to separation from service. At my employer all unvested RSUs were forfeited for anything other than retirement or death. If so in your case, you'll forfeit a potential of $60K.

Also, as others have stated, vested amounts will show up as income on your W2 in the year they vest.
That’s correct in my case. I would forfeit the unvested shares.
Last edited by icedtea on Sat Jul 21, 2018 12:43 pm, edited 1 time in total.

icedtea
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Re: Understanding Restricted Stock Units (RSU)

Post by icedtea » Sat Jul 21, 2018 10:15 am

cockersx3 wrote:
Fri Jul 20, 2018 6:22 pm
MotoTrojan wrote:
Fri Jul 20, 2018 5:06 pm
icedtea wrote:
Fri Jul 20, 2018 4:30 pm
mhc wrote:
Fri Jul 20, 2018 4:15 pm
When shares vest, the fair market value (FMV) of the shares is counted as wages. You don't have to do anything out of the ordinary. Once you have the shares, they follow normal tax rules for stocks with a cost basis equal to the FMV when they vest.

Before the shares vest you have to instruct the brokerage on how to handle the vesting because taxes are due immediately. The most common method is to withhold shares to cover the tax. You will then get the remaining shares. I recommend selling the remaing shares immediately which will incur a small short term cap gain/loss.
Thanks. So would the calculation for this scenario be correct?

Scenario: $23 per share on 1 year vesting date
Receive 1/4 of shares - 1000 shares
1000x23=23000 - income tax (assume 32% for me) = $15640
Sell shares on vesting date to incur small gain/loss, end up with roughly $15640 give/take.
Yup, if they are RSUs and not options that is exactly how it works. Certainly seems worth staying another 2.5 months if that is when you'll get it.
I agree, sort of.

For RSU's that I have received in my career, the company usually sells a portion of the shares you receive to cover the taxes. Not sure if this is what everybody does, but it has been my experience. So in the OP's example, when the RSU's vest I suspect OP will likely receive approx 680 vested shares with a cost basis of $23. The other 320 shares would have been sold to pay the 32% tax on the 1000 original shares. OP would then sell the remaining shares and receive 680 x 23 = $15640, less any transaction fees incurred by the brokerage during the sale. So same amount overall, just a different way to get there.

Note that, in my experience, the original value of the vested RSU's ($23,000) and the taxes paid when the RSU's vested (by selling shares) will be included in the OP's W-2 from the employer, if it is similar to my experience. I believe the taxes paid include payroll taxes as well (ie FICA, medicare, etc) as well as normal income taxes, but not 100% certain.

If the OP doesn't sell on the day of vesting, OP will receive whatever 680 shares of that stock is worth at that point. OP will then have to report capital gains on 680 x ((Share price at date of sale) - $23) assuming the cost went up after vesting. Otherwise it's a loss from the $23 basis.

Hope this makes sense!
Thanks, I believe that’s how my company would handle it, too.

If the stock price on vesting date was lower than the value on my first day of employment, would I still be able to sell the vested shares at the stock price on my first day, or would I get the price on the vested date? Curious if there’s a guaranteed minimum price of the shares.

TravelGeek
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Re: Understanding Restricted Stock Units (RSU)

Post by TravelGeek » Sat Jul 21, 2018 12:16 pm

icedtea wrote:
Sat Jul 21, 2018 10:13 am


That’s correct in my case. I would forfeit the invested shares.
Unvested, I assume?

That’s the case for me as well.

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cockersx3
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Re: Understanding Restricted Stock Units (RSU)

Post by cockersx3 » Sat Jul 21, 2018 7:54 pm

icedtea wrote:
Sat Jul 21, 2018 10:15 am
cockersx3 wrote:
Fri Jul 20, 2018 6:22 pm
MotoTrojan wrote:
Fri Jul 20, 2018 5:06 pm
icedtea wrote:
Fri Jul 20, 2018 4:30 pm
mhc wrote:
Fri Jul 20, 2018 4:15 pm
When shares vest, the fair market value (FMV) of the shares is counted as wages. You don't have to do anything out of the ordinary. Once you have the shares, they follow normal tax rules for stocks with a cost basis equal to the FMV when they vest.

Before the shares vest you have to instruct the brokerage on how to handle the vesting because taxes are due immediately. The most common method is to withhold shares to cover the tax. You will then get the remaining shares. I recommend selling the remaing shares immediately which will incur a small short term cap gain/loss.
Thanks. So would the calculation for this scenario be correct?

Scenario: $23 per share on 1 year vesting date
Receive 1/4 of shares - 1000 shares
1000x23=23000 - income tax (assume 32% for me) = $15640
Sell shares on vesting date to incur small gain/loss, end up with roughly $15640 give/take.
Yup, if they are RSUs and not options that is exactly how it works. Certainly seems worth staying another 2.5 months if that is when you'll get it.
I agree, sort of.

For RSU's that I have received in my career, the company usually sells a portion of the shares you receive to cover the taxes. Not sure if this is what everybody does, but it has been my experience. So in the OP's example, when the RSU's vest I suspect OP will likely receive approx 680 vested shares with a cost basis of $23. The other 320 shares would have been sold to pay the 32% tax on the 1000 original shares. OP would then sell the remaining shares and receive 680 x 23 = $15640, less any transaction fees incurred by the brokerage during the sale. So same amount overall, just a different way to get there.

Note that, in my experience, the original value of the vested RSU's ($23,000) and the taxes paid when the RSU's vested (by selling shares) will be included in the OP's W-2 from the employer, if it is similar to my experience. I believe the taxes paid include payroll taxes as well (ie FICA, medicare, etc) as well as normal income taxes, but not 100% certain.

If the OP doesn't sell on the day of vesting, OP will receive whatever 680 shares of that stock is worth at that point. OP will then have to report capital gains on 680 x ((Share price at date of sale) - $23) assuming the cost went up after vesting. Otherwise it's a loss from the $23 basis.

Hope this makes sense!
Thanks, I believe that’s how my company would handle it, too.

If the stock price on vesting date was lower than the value on my first day of employment, would I still be able to sell the vested shares at the stock price on my first day, or would I get the price on the vested date? Curious if there’s a guaranteed minimum price of the shares.
I'm pretty sure that your cost basis would be the value of the shares on the day they vest, not on when they were issued. The whole idea of giving equity RSUs , I believe, is to incentivize employees to do things that maximize share price by giving you "skin in the game.". If that's true, then assigning a minimum price would defeat the purpose of giving out RSUs.

Hope this helps!!

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