When Should I Sell My RSUs?
If you find yourself with RSUs (restricted stock units) as part of your compensation package, it can be exciting to watch their value go up over time as you “vest” and await the series of dates you are allowed to access this stock and sell it.
RSUs are common elements of compensation in public companies, especially in fast-growth industries like tech. When you join your company, you will get a compensation package that includes base salary and other comp such as bonus and stock, adding to a total value. The value of the stock can be determined by the amount of shares you receive, divided by the years you will be receiving them, divided by the current stock price.
- 2000 shares (500 per year)
- $50 a share
- $25,000 a year value
Stock can go up or down in value, but the good news is that with RSUs you will never pay tax on more than you get. You pay tax on the shares when they vest.
What does vesting mean?
When you receive a stock grant, you have to wait a certain amount of time before you get that stock. Usually there is a one-year cliff (some companies have longer cliffs) which means you won’t get any stock until you’re at the company for 1 year. After this, you will continue to receive stock in set increments until you get your entire grant from when you were hired (you may also get “refreshes” as you vest, which means that you will continue to get stock after the initial grant fully vests, if you choose to stay at the company past this date (usually the first grant is the most valuable, and after the vesting period you may need to look for another job to achieve the same income.)
How long should I hold my RSUs after they vest? Can I get long term capital gains on my RSUs?
This is a common confusion with people who receive RSUs. The simplest way to think about your RSUs is that they are a cash bonus where you are forced to purchase company stock on the day you receive that bonus. You have to pay tax–income tax–the day you get the stock.
Can you hold the stock a year for long term gains? The simple answer is no. You are taxed the day you get the stock, whether you sell it or hold it. If you get $25,000 stock on your first year of vest, this will be counted as $25,000 income the year you receive this stock.
If you don’t sell immediately, the $25,000 would be your cost basis. In other words, it’s like you bought $25,000 worth of your company stock on the day you vest. If the share price goes up, you pay capital gains on the gains from $25,000. If it goes down, you can take a capital loss. Just like with any stock purchase, at that point if you hold a year you can take advantage of long-term capital gains tax rates. But, remember, you cannot avoid paying income tax on the $25,000 (or whatever the value is the day you vest.)
Tax Traps – What to Watch Out For
Even if you decide you want to take a risk and hold your company stock longer (not recommended), you can end up in a big tax pickle. This is because companies rarely take enough taxes out of your RSUs when they vest to actually pay what you owe. Your company likely will sell some stock and send the proceeds to the government each time you vest — but it won’t be enough in most cases. You need to send an estimated tax payment of what you owe (remember your total income is your base + bonus + commission + RSU value on day of vest) for the quarter.
It can get complicated, so talk to your accountant. The last thing you want is to owe tens of thousands of dollars of tax come April 15 — and not having the funds to cover it.
Reasons to NOT Hold Your RSUs After Vest
Even if you think your company will outperform the market, you still face a lot of limitations with your company stock that makes it less attractive to hold. Public companies have blackout periods for employees where they can’t buy or sell stock. Even if you think your company stock will keep going up and up, there are factors you can’t control (no one predicted a global pandemic.) If you have a large amount of money in your company stock, you may have to helplessly watch it go down when you wait until a blackout period ends.
It is never advisable to buy individual stocks, but owning stock in a company you can’t sell at any time is dangerous, especially if you have a lot of your money in company stock.
Another common reason to not hold onto your RSUs is that as long as you’re working for the company, you are double relying on the company for your financial stability and growth. If the company hits hard times, you may see your stock value drop AND get laid off the same week. That won’t be fun.
Financial experts recommend holding no more than 5% of your total networth in one company’s stock. If you are really bullish on a company and are fairly well off, you can stretch that to 10%, but you have to accept you may lose all of that money, or a chunk of it. If you have vested RSUs that you already paid tax on and they account for more than 5-10% of your networth, I highly recommend working with a tax professional to come up with a plan to sell them off and reinvest them a diversified index fund(s.)
What do you think? Do you hold your RSUs? Sell them immediately? Share your thoughts in comments below.
