Restricted Stock Units (RSUs) have become a common form of employee compensation, particularly in the tech and startup sectors. Understanding the tax implications of RSUs is crucial for optimizing financial outcomes, with the cost basis playing a pivotal role in determining taxes owed when shares are sold.
Navigating RSU taxation involves factors like withheld shares and compensation adjustments. Proper documentation ensures compliance and accurate reporting.
How the RSU Cost Basis Is Determined
The cost basis of RSUs is established by the fair market value (FMV) of the shares on their vesting date. At vesting, RSUs are treated as income, and the FMV—typically the stock’s closing price on that day—becomes the initial cost basis. For example, if an employee’s RSUs vest when the stock closes at $50 per share, the cost basis for each share is $50.
At vesting, the FMV of RSUs is included in your Form W-2 wages, because the value at vest is taxed as ordinary income. 1Internal Revenue Service. U.S. Taxation of Stock-Based Compensation Received by Nonresident Aliens (Video Transcript)
This cost basis is critical in calculating taxable gains or losses when shares are sold. Selling shares above the cost basis results in a capital gain, while selling below it results in a capital loss. Your holding period starts the day after you acquire the shares and determines whether the gain or loss is short-term or long-term. 2Internal Revenue Service. Publication 550, Investment Income and Expenses As of 2025, long-term capital gains are taxed at preferential rates between 0% and 20% depending on income, while short-term gains are taxed as ordinary income. 3Internal Revenue Service. Topic No. 409 Capital Gains and Losses
Effects of Withheld Shares on Cost Basis
When RSUs vest, employers often withhold shares to cover taxes, which affects how the cost basis applies to the shares you actually receive. For instance, if an employee is granted 100 RSUs and 30 are withheld for taxes, only 70 shares are deposited into the employee’s account. The per-share cost basis is still the FMV at vesting (for example, $50 per share), so the total basis for the 70 received shares is $3,500, while the withheld 30 shares are treated as used to satisfy tax withholding.
This can cause confusion, as employees may mistakenly believe the cost basis applies only to the shares they receive in a way that changes the per‑share basis. In the example above, even though the employee receives only 70 shares, the per‑share basis remains $50; the total basis for the 70 shares is $3,500.
When the employee sells the 70 shares, the capital gain or loss is determined by comparing the sale proceeds for those 70 shares to their total basis of $3,500 (i.e., $50 per share). Misunderstanding this can lead to overpaying taxes or underreporting income, resulting in penalties. Employees must clearly track and understand this process to avoid unexpected tax liabilities.
Adjusting Cost Basis for Additional Compensation
Certain compensation elements can impact the cost basis of RSUs. For instance, if an employee receives a cash bonus tied to stock performance and uses it to purchase additional shares, the cost basis of these shares is based on their purchase price, which differs from the RSUs’ original vesting value.
Stock options granted alongside RSUs can further complicate cost basis calculations. When stock options are exercised at a strike price below the market price, the difference may require adjustments to the cost basis for tax purposes. These adjustments are governed by provisions in the Internal Revenue Code, which outline how incentive stock options are treated.
Tax strategies, such as donating appreciated RSU shares to a qualified charity, can also affect the cost basis. Donating shares provides potential tax benefits, including a deduction based on the FMV at the time of donation and the elimination of capital gains taxes on the donated shares. Understanding these adjustments is vital for optimizing tax outcomes.
Documenting RSU Transactions for Tax Purposes
Accurate documentation is essential for managing RSUs and ensuring compliance with tax regulations. Employees should maintain detailed records of the vesting schedule, which tracks when RSUs become fully owned. This schedule aligns with Form W-2, where RSU income is reported, making it critical to verify that the form accurately reflects vested RSU income. 4Internal Revenue Service. U.S. Taxation of Stock-Based Compensation Received by Nonresident Aliens (Video Transcript)
Selling RSU shares adds another layer of complexity, requiring meticulous tracking of sale dates, sale prices, and adjusted cost bases. While broker statements typically provide this information, employees should cross-reference these with personal records to ensure accuracy. Capital gains tax implications make precise documentation crucial, as errors can lead to audits or penalties.