So my company offered me some RSUs (restricted stock units) that have just vested - let’s say for simplicity’s sake I’ve got 100 shares. I have to pay taxes on these right away - not a problem, I’ve got it set up to pay the taxes out of the stock value itself.
Let’s also say for simplicity’s sake each share is worth $10, so the total value at time of vesting is $1000, and the taxes they’ll take out will amount to $250. Easy enough - I’ve now got 75 shares.
Here’s my question: if I decide to sell my shares in 2 years and they’re worth $20 at that time. Will I have to pay capital gains on the whole $1500, or will the taxes deduct the $250 I already paid when the stocks vested? In other words, when I sell the stocks, is it basically a whole new tax at 25% (or whatever), or will the taxes I previously paid factor in at all? My HR department is clueless, and it’s proving way more difficult than I imagined to find this info online. Thanks in advance for any info.
First, your company gave you $1,000. It does not matter whether tehy gave you cash, a new car or 100 shares. You pay income tax on that.
Now, you own 100 shares. It’s no different than if you took $1,000 of your own money and bought them - you own them. In both cases, to get $1,000 of shares you also have to give the IRS $250. the only difference is the IRS took $250 off your paycheque, before you got the disposable cash, if you purchased them.
OK, so now you sell them for $2,000. Does not matter where they came from - the declared price when you “bought” (acquired) was $1,000. Your profit is $1,000 - capital gains.
Presumably the tax on capital gains is half the rate as on income, so you only pay $125 on $1000 gain, for arguments’ sake. Perhaps you have a lifetime exemption for the first $X of capital gains, so you pay nothing in tax, although free money does not sound like an IRS concept. (I think that’s how Canada’s law works, the first half million or something used to be free).
Ah, right, I knew the initial payment was income tax, and not capital gains. Sorry for not being clear. So the capital gains tax will be taken off whatever profit I make from the stocks - the original value of the stocks when I received them is not a factor. Is that what you’re saying?
That’s how it would work in Canada, and I’d be shocked if the USA was any different. You bought it for $X from after-income-tax money, you sold for $X+Y, you pay capital gains on $Y but not income tax.
First of all, yes, the broker who actually handles this will gladly perform an initial sell-off to pay the income tax, so that you’re left with 75 shares at $10; this kind of cash-neutral issue is done all the time (technically, you receive $1000, pay $250 taxes on $1000, and raise the cash by immediately selling $250 worth of shares at zero capital gain, which I think you already knew).
If you then sell those 75 shares at $20, you will then pay capital gains tax on the $750 in capital gains. You don’t pay capital gains on shares that you don’t own, nor do shares that you don’t own add to your basis for calculating capital gains.
ETA: Forgot something important – the broker will base the calculated income tax (and sale of stock) on a tax rate supplied by your employer, or on a standard rate – either way, it will be wrong, and you’ll have to adjust your tax return accordingly, because your actual tax rate will depend on your adjusted gross income, which you probably won’t be able to provide at the time of the issue.