Your employer gives you Restricted Stock Units. As they vest, you sell some stock and then report the information provided to you at tax time.
It really should be this easy, but it's not. Taxes just can't be simple.
You might be double-taxed on your restricted stock units if you don't know what to look for. I have encountered this issue on many tax returns with RSU stock sales, which led to a significant overpayment to Uncle Sam.
If you receive and sell RSUs, my goal is to help you…
I know what you might be thinking,..
“I have a tax CPA or tax professional who does my taxes. I don't have to worry about it.”
Well, unfortunately, that's not always the case. I've seen this tax mistake from both self-filers and tax professionals.
I’m going to show you exactly how to spot this mistake and what to look for.
Before we dive in, let's cover a quick refresher on how restricted stock units are taxed.
When RSUs are granted to you, there is no tax liability.
Once RSUs vest, the total value of stock is subject to ordinary income tax in that year. This means that RSUs are subject to the same taxes as your salary—federal, state, Social Security, and Medicare taxes.
Finally, once you sell the shares, you'll owe long or short-term capital gains if the stock has appreciated above the vesting price.
(If you sell your RSUs immediately after vesting, there won't be much capital gain/loss)
We will use Amy as an example to illustrate this throughout this writing.
Amy receives annual RSU grants from her employer and some vests every year. In 2023, she had $120,000 of RSUs vest, subject to ordinary income.
This $120,000 of RSU income is reported on her W2, whether she sells or holds the stock. In other words, she has already paid taxes on this income.
Because this money has been taxed, Amy's stock basis is $120,000. So, if the stock were to go up after vesting, she would owe capital gains on the appreciated amount above $120,000 when she sells the stock.
Since Amy sells her RSUs as soon as possible after vesting, there are generally little to no capital gains.
Double taxation can happen because of how brokerage firms report stock sales.
When Amy sells her RSUs, she is issued a 1099-B from the brokerage firm before she files taxes. Looking at Amy's 1099-B, we can see the total stock sale total was $121,000 (the $120,000 of vested RSUs increased by $1,000 by the time she sold it).
Here is where the double tax comes into play. If you notice, Amy's 1099-B shows a total cost basis of $0.
But wait… she already paid tax on $120,000 (the amount that vested) as W2 income. So, if she reports a $0 basis as the 1099-B says, she will pay tax on this twice!
As you can see, this would double-report her RSU income and result in an additional tax bill of over $40,000 that she didn't need to pay (assuming Amy is in the 35% tax bracket).
The brokerage firm will provide a “supplemental information” document. This can be found on additional pages of the 1099-B or in her brokerage portal.
The supplemental information is to assist in filing taxes with additional information. This information is essential for those who sell restricted stock unit (or even employee stock purchase plan) shares.
In this document, you will see the RSUs broken out by each vesting date and date sold. You might see several lines listing your RSUs that match your vesting schedule and stock sales.
Let's look at Amy's supplemental form to see if we can help her avoid double taxation.
Just like on the first 1099-B form, we can see that the proceeds of her stock sale are $121,000, which is correct since this was the total value of the stock she sold.
Using this supplemental information, we see $120,000 of ordinary income reported, which means her cost basis on the stock is $120,000. ✅ Check and ✅ Check.
This seems much better since the $120,000 was already reported as W2 income, and she paid tax on it. It's essentially the same as Amy taking $120,000 in cash and buying stock.
Since her stock had increased a bit by the time she hit the sell button, this resulted in $1,000 of short-term capital gains. So, the total proceeds of the sale were $121,000, but her cost basis is $120,000. This means she would only report a $1,000 gain instead of the $121,000 gain as the 1099-B showed!
Again, this big difference saved her from paying double tax and an additional $40,000 in unnecessary taxes!
And this mistake is magnified the higher her RSU income gets.
For the current tax year…
Get the supplemental information: Use the supplemental documents supporting your 1099-B to avoid being double-taxed on your RSUs in the year you sold the stock.
If you use a tax professional (which I always recommend), ensure they have the supplemental information.
What to look for: Any time you see a cost basis of $0 on your 1099-B, that should be a red flag. The supplemental information will help you match your RSU sales to the correct cost basis.
For previous tax years…
You might be worried that you were double-taxed in previous years. I'll show you how to check for this quickly.
Pull up any previous tax return or two (the entire tax return PDF). Scroll down until you see Form 8949.
What to look for: If you see a $0 basis 🚩, this should be a sign to investigate further with your financial planner and tax professional. If you were double taxed, consider getting a tax professional to help you amend the return. As you have seen, this might result in thousands of dollars back in your pocket!
I hope this writing helps you avoid the mistake of double-taxing your RSU income or even gets you some money back. We review this for our clients each year to help them create a proactive tax strategy within a financial plan. If you want to explore how to maximize your stock compensation strategy, reach out.
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