Fact Check: Are RSUs taxed as capital gains?

Are RSUs Taxed as Capital Gains?

Introduction

The claim in question is whether Restricted Stock Units (RSUs) are taxed as capital gains. This topic is particularly relevant for employees receiving RSUs as part of their compensation packages, as it directly impacts their tax liabilities. The taxation of RSUs involves multiple stages, including ordinary income tax upon vesting and potential capital gains tax upon sale, which can lead to confusion about how these taxes are applied.

What We Know

1. Taxation Upon Vesting: RSUs are taxed as ordinary income when they vest. This means that the fair market value of the shares at the time of vesting is included in the employee's W-2 income, and taxed at ordinary income tax rates 46.

2. Capital Gains Tax: After the RSUs vest and the employee holds the shares, any subsequent sale of the stock can result in capital gains tax. If the employee sells the shares for more than the vesting price, the difference is taxed as capital gains. The rate depends on how long the shares are held post-vesting:

   • Short-Term Capital Gains: If the shares are sold within one year of vesting, the gains are taxed at ordinary income rates 28.
   • Long-Term Capital Gains: If the shares are held for more than one year after vesting, the gains are taxed at the lower long-term capital gains rates, which can be 0%, 15%, or 20%, depending on the taxpayer's income level 79.

3. Reporting Requirements: Employees must report the income from vested RSUs on their tax returns, and any capital gains from the sale of those shares must also be reported, typically using Schedule D and Form 8949 10.

Analysis

The claim that RSUs are taxed as capital gains is partially true but requires clarification. The initial taxation of RSUs occurs at vesting when they are treated as ordinary income, which is a critical point often overlooked in discussions about capital gains.

Source Evaluation

• Tax Shark Inc. 1: This source provides a straightforward explanation of RSU taxation, but it lacks detailed citations and may not be considered a primary source of tax information.

• TurboTax 2: As a well-known tax preparation service, TurboTax offers reliable information, but it may have a bias towards promoting its services, which could affect the presentation of information.

• Pulley 3: This guide presents a clear overview of RSU taxation and distinguishes between short-term and long-term capital gains. However, it is essential to consider that Pulley is a financial technology company, which may have an interest in promoting understanding of RSUs to attract users to its platform.

• The Tax Adviser 4: This is a professional publication aimed at tax professionals, providing a more authoritative perspective on tax implications. The reliability of this source is high due to its professional focus.

• Investopedia 5: While generally reliable, Investopedia articles can vary in depth and may not always reflect the most current tax laws.

• Cordant Wealth Partners 6: This source discusses tax strategies related to RSUs, which may introduce a conflict of interest as it aims to promote financial planning services.

• Harness Wealth 7: This article provides a comprehensive overview of long-term capital gains rates, but it is essential to assess whether it presents a balanced view or promotes specific financial products.

• Exchange Capital 8: This source offers a clear explanation of RSU taxation but may lack the depth of analysis found in more authoritative tax publications.

• Accounting Insights 9: This source provides a practical overview of reporting RSUs, making it a useful reference, though it is important to verify its claims against more authoritative sources.

• Charles Schwab 10: As a major financial services firm, this source is generally reliable, but it may have a vested interest in promoting investment strategies that involve RSUs.

Methodological Considerations

The analysis of RSU taxation involves understanding both the timing of taxation (at vesting vs. at sale) and the applicable tax rates. A comprehensive examination would benefit from additional data, such as specific examples of tax scenarios, changes in tax law, and the impact of state taxes, which can vary significantly.

Conclusion

Verdict: Partially True

The assertion that RSUs are taxed as capital gains is partially true, as it overlooks the critical fact that RSUs are first taxed as ordinary income upon vesting. This means that while any gains realized from the sale of RSUs may indeed be subject to capital gains tax, the initial taxation occurs at vesting, which is often a point of confusion.

It is important to note that the taxation of RSUs involves multiple stages, and the rates applied can vary based on how long the shares are held after vesting. This complexity contributes to the uncertainty surrounding the claim. Additionally, the sources consulted provide varying levels of reliability and may have inherent biases, which should be considered when interpreting the information.

Readers should be aware that tax laws can change, and individual circumstances may vary significantly. Therefore, it is advisable to consult a tax professional for personalized guidance and to critically evaluate information regarding tax implications of RSUs and other financial matters.

Sources

1. Tax Shark Inc. - When are Restricted Stock Units (RSUs) Taxable? Avoid this Mistake + FAQs. Link
2. TurboTax - How to Report RSUs or Stock Grants on Your Tax Return. Link
3. Pulley - RSU Tax 101: How Restricted Stock Units Are Taxed. Link
4. The Tax Adviser - Stock-based compensation: Tax forms and implications. Link
5. Investopedia - How Restricted Stock and Restricted Stock Units (RSUs) Are Taxed. Link
6. Cordant Wealth Partners - RSU Taxes Explained + 4 Tax Strategies for 2023. Link
7. Harness Wealth - Restricted Stock Units (RSUs): Everything You Need to Know. Link
8. Exchange Capital - How Are Restricted Stock Units Taxed? Link
9. Accounting Insights - How to Report RSUs on Your Tax Return. Link
10. Charles Schwab - RSU Taxes and PSU Taxes: A Guide. Link