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Calculating the Cost Basis of Restricted Stock Units: A Comprehensive Guide

Restricted Stock Units (RSUs) are a common form of equity compensation awarded to employees by companies. RSUs represent a promise to issue a specific number of shares of company stock at a future vesting date. Understanding the cost basis of your RSUs is essential for accurate tax reporting and financial planning. In this article, we’ll explain how to calculate the cost basis of RSUs and discuss the tax implications involved.

 

Grant Date and Vesting Date

RSUs are typically granted to employees as part of their compensation package. The grant date is the day the RSUs are awarded, and the vesting date is the day when the RSUs convert to actual shares of company stock. Vesting schedules vary but may be based on time, performance milestones, or a combination of both.

Cost Basis of RSUs

The cost basis of your RSUs is determined by the fair market value (FMV) of the shares on the vesting date. When the RSUs vest and the shares are issued to you, the FMV of the shares at that time becomes your cost basis for tax purposes.

Here’s a simple example:

  • You are granted 100 RSUs on January 1, 2022

  • The vesting date is January 1, 2023

  • The FMV of the shares on January 1, 2023, is $50 per share

In this case, your cost basis for the 100 RSUs is 100 shares x $50 per share = $5,000.

Tax Implications

When your RSUs vest, the FMV of the shares on the vesting date is considered taxable income and must be reported on your income tax return. This income is typically subject to federal, state, and local income taxes, as well as Social Security and Medicare taxes. Your employer may withhold a portion of the shares to cover the required tax withholding or may allow you to choose an alternative withholding method.

Using the example above, the $5,000 FMV of the shares at vesting would be reported as taxable income. Suppose your employer withholds 20 shares to cover the tax liability. In that case, you would receive 80 shares with a cost basis of $4,000 (80 shares x $50 per share), and the remaining $1,000 (20 shares x $50 per share) would be treated as taxes withheld.

Capital Gains and Losses

When you eventually sell the shares acquired from your vested RSUs, you may realize a capital gain or loss. The gain or loss is determined by the difference between the cost basis of the shares (the FMV at the vesting date) and the sale price. The holding period, or the time between the vesting date and the sale date, will determine whether the gain or loss is classified as short-term or long-term for tax purposes.

For example, if you sell the 80 shares mentioned above for $60 per share, you would realize a capital gain of $800 [(80 shares x $60 per share) – $4,000 cost basis]. If you held the shares for more than one year, the gain would be considered a long-term capital gain and subject to the lower long-term capital gains tax rates.

Conclusion

Understanding the cost basis of your RSUs and the related tax implications is crucial for proper tax reporting and financial planning. Remember that the cost basis of your RSUs is determined by the FMV of the shares on the vesting date, and taxes must be paid on this amount as ordinary income. When selling shares acquired from RSUs, it’s essential to consider the potential capital gains or losses and the tax treatment based on your

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For more information on Restricted Stock Units, visit the IRS website at www.IRS.gov