What are the three key dates to track when managing your RSU grants?
If you receive restricted stock units as part of your compensation you know that managing them and their tax implications can often prove tricky. When do you receive them and how much are they worth? At one point are they actually yours? When can you sell them? What are the tax implications if you sell them now versus later?
To make sense of the questions above and, ultimately, to make solid financial decisions with your restricted stock, there are three key dates you must track:
- Grant Date
- Vesting Date
- Sell Date
The grant date is the date your company awards you the restricted stock units. Importantly, the grant date has zero tax implications because the shares haven't vested yet.
Which leads us to the next important date to remember...
The vesting date is probably the most important date to remember. Commonly, when you receive restricted stock units, the shares vest over a series of years. Prior to vesting, you don't technically own the shares. In fact, if you leave the company for whatever reason prior to the vesting date, you will likely part without any of your unvested restricted stock units.
So what happens on the vesting date? Well, at that point, the stock units are now yours and you can sell them or hold onto the stock to benefit from any future appreciation in the stock. Importantly, the vesting date has tax implications and you will pay taxes on your RSUs at your ordinary income tax rate based on the value of the shares at vesting.
- Can you avoid paying taxes on the vesting date?
- Nope! You now have earned income, via the RSUs, and you owe income tax on that income.
- Can you forget the vesting date once it happens?
- The answer here is also 'No.' Unless you sell your RSUs on the vesting date, you must keep track of the relevant vesting date for each tranche of shares because it will define the amount of taxes you pay on the sale date.
The sale date is exactly what you would expect - it is the date on which you sell your shares. The sale date matters because you will pay capital gains tax on any gains or losses on the shares relative to the vesting date. However, depending on how long you have owned the RSUs since vesting, the tax rate will vary.
For example, if you sell your shares within one year of the vesting date, you will pay short-term capital gains tax. However, if you sell after holding the shares for one year, you will pay long-term capital gains tax. This matters, because the difference between short-term and long-term capital gains taxes can vary greatly depending on your total income.
- Short-Term Capital Gains are taxed at your ordinary income tax rate
- Long-term Capital Gains are taxed at 15% for most earners
- Notably, high income earners may pay 20% on capital gains while low income earners may pay 0%.
As an example, take the case of Tina, an executive at XYZ company. As part of a promotion in 2020, Tina was granted $100,000 of RSUs that vest over four years with one quarter of the shares vesting on October 1st of each year, respectively.
On October 1st, 2021, Tina's first tranche of shares vest (25% of the initial $100,000 granted). Assuming the stock price hasn't moved for simplicity's sake, Tina will now owe ordinary income tax on $25,000 worth of vested shares. If she sells the shares immediately upon vesting, she will owe no additional taxes. However, Tina decides to hold the shares for 6 months at which time she sells the shares for $27,000, a gain of $2,000.
Next tax season, Tina will have to pay taxes on $2,000 of short-term capital gains ($27,000-$25,000). Because they are short-term capital gains, she will pay taxes at her ordinary income tax rate. If she had held the shares for over 12 months and then sold, she would have paid taxes at the long-term capital gains rate.
Restricted Stock Units (RSUs) are a common and often lucrative form of compensation for many executives. However, the shares can complicate your financial life and arrive with their own unique tax implications. Ultimately, keeping track of the three key dates for RSUs will allow you to more effectively manage your Restricted Stock Units.
Do you have any questions? Please don't hesitate to reach out.