How Are Restricted Stock Units Taxed?

By Kevin Estes

Today’s question comes from a current T-Mobile employee:

What are the tax implications and capital gains when selling Restricted Stock Units?

Great question! Thank you for asking.

Let’s start with the basics.

Restricted Stock Units (RSUs) Defined

Restricted Stock Units are grants given to employees to help retain them and align their incentives with the company’s.

If the employee stays employed with the company through a certain date, they’ll receive company shares related to the number of Restricted Stock Units.

That’s called vesting.

After vesting, the employee owns and can usually sell the shares right away.

Accept Restricted Stock Unit (RSU) Grants!

Please accept your grants.

For T-Mobile employees, they’re usually made available in late February.

If they’re going to throw money at you, catch it.

Restricted Stock Unit (RSU) Grant Details

Say someone is granted and accepts 150 Restricted Stock Units on 2/25/2023. The units vest over three years:

• 50 units on 2/25/2024

• 50 units on 2/25/2025

• 50 units on 2/26/2026

Different companies have different vesting schedules.

At the time of the grant, the stock price was $100. Therefore, the total grant value was $15,000.

Restricted Stock Unit (RSU) Vest

Now, let’s pretend it’s 2/26/2024.

Good news! The employee still works with the company.

50 units vested yesterday!

Restricted Stock Unit (RSU) Tax Withholding

Unfortunately, the employee didn’t receive all 50 shares.

Some of the shares were sold to cover taxes.

Let’s assume 15 of the 50 shares were withheld for federal taxes, Social Security, and Medicare.

For T-Mobile, the withholding percentage is set for the employee by the company and communicated to Fidelity.

Instead of the full 50 shares, the employee received 35 shares.

Restricted Stock Unit (RSU) Income Tax

The value of the 50 shares is treated as taxable income.

Let’s say the stock price rose from $100 to $110 over the course of the year.

The employee is taxed on the value of the shares when they vested on 2/25/2024.

In this case, that’s 50 shares times $110 share price, or $5,500.

(50 shares * $110 share price = $5,500)

The full $5,500 is treated as income.

The 15 shares sold and withheld for taxes are worth 15 shares times $110, or $1,650.

(15 shares * $110 share price = $1,650)

Both the income of $5,500 and the tax withholding of $1,650 will be reported on the 2024 tax Form W-2.

Restricted Stock Unit (RSU) Shares Received

The remaining 35 shares are worth 35 times $110, or $3,850.

(35 shares * $110 share price = $3,850)

The employee receives 35 shares worth $3,850.

Here’s where people get confused!

The basis of the stock is equal to the value at the time the units vested.

The employee gets credit for having “paid” $3,850 for the 35 shares.

Unless subject to trading restrictions, the employee could sell the stock right after it vests for $110 and pay no additional taxes!

If the employee chooses to keep the stock, it’s like they use money in their checking account to buy it.

Is that what they want to do?

Restricted Stock Unit (RSU) Taxation After Vest

After vest, shares are treated as if the employee bought the stock for the share price on the vest date.

In this example, the shares are then treated as if the employee bought 35 shares for $110 on 2/25/2024.

Restricted Stock Unit (RSU) Short Term Gain

If they sell the stock on or before 2/25/2025, the gain or loss will be short-term.

Let’s say the price rises from $110 to $120 and the employee decides to sell it on 9/9/2024.

Because that’s less than a year after “purchase”, the gain will be taxed as a short-term capital gain - usually at the employee’s ordinary income tax rate.

Let’s say the employee is at the 24% federal marginal income tax bracket and they live in Washington, which doesn’t have a state income tax.

They’ll be taxed on the $10 gain for the 35 shares they sold.

$10 gain times 35 shares times 24% tax rate equals a tax of $84.

($10 gain * 35 shares * 24% tax rate = $84 tax)

Restricted Stock Unit (RSU) Long Term Gain

If they instead sell the stock on or after 2/26/2025, the gain or loss will be long-term.

Say they held onto the stock and sold it on 3/1/2025.

It’s been a meh few months and the stock is still worth $120.

Since they held onto the stock for at least a year and a day, they’re taxed their lower long-term capital gains rate of 15%.

$10 gain times 35 shares times 15% tax rate equals a tax of $52.50.

($10 gain * 35 shares * 15% tax rate = $52.50 tax)

Restricted Stock Unit (RSU) Long Term Tax Benefit

Holding onto the shares for over a year results in a slight tax benefit. Instead of paying $84 in taxes, they pay $52.50.

That’s nearly six months of risk for $31.50 in tax savings.

Restricted Stock Unit (RSU) Example Applicability

This is an admittedly simple example. However, the general principles apply to larger Restricted Stock Unit vests.

I hope it helps!

If you’d like a review of your specific situation, feel free to…

Disclaimer

In addition to the usual disclaimers, neither this post nor this image includes any financial, tax, or legal advice.