Just to reiterate: I would just about guarantee that they treated the full value of ALL the shares as income - they would have to. Even though you did not shell out cash for those shares, you DID receive them as income - exactly as if they had, say, given you 10,000 dollars and made you purchase 100 shares right then.
Discuss with e-Trade, and/or your company’s payroll department, but I am nearly certain that your basis is NOT zero, it is the per-share price as of when they transferred ownership to you (and simultaneously sold 40% of the shares).
OK, and I probably said that backwards: cost basis is 100% and taxes were paid against that in the range of 40%. (not sure if they portion out that tax payment between IRS and CA though. Gosh this is a headache)
PS and of course I just remembered I have to pay a $5900 quarterly today
I found a number of cites that support what my experience was. Also, that 40% of shares was probably distributed among the federal, state, and social security (as mine was).
That estimated tax will be painful - but at least you should be able to make that IRS letter go away soon.
Something similar happened to me about 20 years ago. This was the first year I had income from executing non-statutory stock options, so the gain from the execution was reported as ordinary income. Since I didn’t understand the proper way to report the gain, and the statements from my broker showed the tax basis as the option price, I figured the right thing to do was to subtract the gain from my ordinary income and report it under short-term capital gains.
Got flagged by the IRS and received a love letter. By that time I had learned the proper way to report income from NSOs (report ordinary income as on the W2, adjust cost basis on capital gains form). I called the IRS, explained the situation. They said to file a 1040x with the reporting in the right places. I did that, the difference was $0 (since I just just had things in the wrong place), and the issue disappeared.
On the date the RSUs vest, the value of the shares is added to your ordinary income. The proceeds from the shares that are sold for taxed are applied to your federal, state, local, SS, and Medicare withholdings just like you got a cash bonus. All this is added to the appropriate boxes on your W2.
The cost basis when you sell the stock is the amount which was reported as ordinary income. If you sell immediately upon vesting the sales costs may show a slight loss on your Schedule D.
You have an RSU grant for 100 shares of stock in company XYZ.
On the date that the RSU vests XYZ stock is $10/share.
Therefore, on the vesting date you receive ordinary income of $1000.
You need to have taxes withheld on that $1000 like any other ordinary income. Your company sells enough stock to cover the withholding - say $280 for federal income tax, $50 for state income tax, $62 for Social Security, and $28 for Medicare.
On your W2 $1000 is added to box 1 (above you regular wages), $280 to box 2, $62 to box 4, $28 to box 6, and $50 to box 16.
Your tax basis for the stock is $10/share. When you sell the stock that is the basis you use. In my tax program (H&R Block) I need to check the box “reported tax basis is wrong” and enter the correct amount.
In the case here the granted stock was sold immediately, so there would be no capital gain and thus no capital gains tax on them. As you said, they are ordinary income.
As an aside about why this is important, during the bubble a lot of people got grants or exercised options and kept the stock, expecting to pay the tax on it later. When the stock prices tanked many found that the value of the stock was no longer adequate to meet the tax payments. Perhaps this is why stock is sold by the company to pay the taxes immediately.
If you’re thinking dot-bomb, yeah I remember folks screwing themselves. It’s been so long (15 years?) since I had employee stock options I’ve nearly forgotten how they work. IIRC correctly, you’d get options at, say $10/share. At vest time you could buy the shares for $10 but they were probably worth more, let’s say $100, so you’d exercise and sell immediately to pay off the $10/share and make a $90/share profit. That profit would be regular income since there was no holding period, and the gummit would calculate your taxable gain as if you sold at $100 at vest time. Some folk would pay the $10/share (which could add up to a substantial amount) and try holding the stock for 1year+1day to get a lower tax rate. Misfortune would strike, the stock goes to $1, and those folks are not only looking at a $9/share loss of what they paid, but the feds would want taxes paid on shares that were $100/share where you never saw a gain at all. Total cluster.
I don’t think this is correct. The profit is not regular income “since there was no holding period” and it makes no difference how long you hold onto it - that profit was ordinary income.
Essentially, if your employer gives you something which is valued at $100 for $10, then they are giving you $90 of income. They are giving you $90 of free stock, and anything they give you is income, whether it’s cash, stock, used toothbrushes, whatever. Any change after that point is either a gain or a loss, but that $90 of “gain” is ordinary income and no amount of holding it will change that.
I assume those people who held onto it were hoping to make some actual capital gains. But if they were really hoping to change the tax treatment of the discount they already got, then that was never going to work.
You need a CPA, not an attorney. You’re not at that stage yet.
Find a bored-looking CPA. Not one of those guys who advertisers about how they can get you off of IRS lists. Just look for a quiet professional to review things and work with the IRS to resolve them. If you can bring such a person a list of each of the errors in the form you’ll be more than likely to skate. The IRS will listen to a CPA where they won’t listen to you.
Yes, the people who got bitten were exercising Incentive Stock Options (ISO), which indeed let you defer tax until sale (but were immediately subject to Alternative Minimum Tax - another tax-time surprise). Much more common were Non-Qualified Stock Options (NQO) which were taxable at time of exercise; when you exercised you either needed to sell enough shares to cover tax withholding or pony up the equivalent cash. Similar to RSUs, profit on the options at time of exercise was reported as ordinary income on your W2 and the tax basis was the share price on the exercise date.
Accounting for ISOs and NQOs also differed at the corporate level (can’t remember any details). First round of options I received were ISOs, thereafter everything was NQOs. Since I always exercised and dumped the difference was moot to me (except for the aforementioned AMT on the ISOs).
As a side note: I was rather annoyed that they sold the shares when issuing the stock. I’d have rather they simply withheld extra tax from my regular paycheck, and let me keep the full 7 shares.
I don’t know if such plans are allowed to do it that way, or if they are mandated to cover the tax by reducing the shares.
It might be a lot tougher if the amount is larger - e.g. if I’d gotten 70 shares vs 7, the tax would have wiped out my entire paycheck.
I just spoke on the phone with my assigned EA. It was mostly a “here’s how the process will work” call, and she hadn’t done a full review of my figures yet. I need to sign an authorization then she can get to work on my stuff, results in 1-2 weeks.
Interesting part was that she said we’ll be BFFs into 2021, since because of Covid the IRS is eight months behind on processing things. Apparently earlier in the year is what they call “RSU Season” because cases like mine all pop up at once. That’s usually early summer, but RSU season came late this year, and processing whatever response I send them will take probably another eight months. I should get back a “stall letter” from the IRS, “we’ve received your response and will be reviewing it” in 2-3 weeks after we respond, but I shouldn’t expect anything else for quite some time.
Second interesting thing was, if I filed preliminary figures rather than adjusted ones for 2018 and paid too much tax, this process would fix that and I wouldn’t need to refile/amend my 2018 taxes.
This was the main fuckery at the time. ISOs were great, unless you hit AMT. Which almost everyone did. And so people had to pay huge amounts of tax on stock that ended up being worthless.
The loss could be applied to future years, but only like $5,000 per year or some such. Not very useful if the loss was hundreds of thousands of dollars, which it often was.
My main grant was a mix of ISOs and NQs, because there was a dollar limit as well. So I got the max amount possible for ISO and the rest in NQ. Didn’t matter much since due to the AMT issue they were all effectively treated as NQ.
Well, not exactly. When the option vested, if the option were under water, you just wouldn’t exercise. End of problem. If it were above water, you’d exercise-and-sell and file taxes on the profit. It’s only if you exercise and hold the shares that you could get screwed by AMT IIRC, since the real profit was an estimate, not yet known.
Right. But the whole benefit to ISOs was tied to exercise-and-hold. Without that, the treatment was the same as NQs.
If it were possible to write off more than the normal limit, it would have been fine. Big deal, you played the lottery and lost. And it’s not like the IRS doesn’t recognize that you shouldn’t have to pay tax on an unrealized gain, since the loss could be applied to future taxes. It was just way too slow.
Exactly. Again going from 20yo memory, that’s how the dot-bomb people screwed themselves: they owned AMT on unrealized profit from stock they exercised-and-held that went underwater. The feds charged AMT on the worthless shares – pay up or else – which could be fixed the following year in a tax filing, but the folk holding the stock bankrupted themselves in the interim paying the AMT on a never-realized gain.
