This type of income is commonly seen on W2s of our clients in San Francisco, and increasing in New York, Chicago, Los Angeles, Boston, Austin, and other cities where we have a large client base. Because of our extensive experience with these types of clients, we have seen many variations and scenarios of how the tax effects ultimately are shown on your return. We will attempt to summarize some of these below. Please feel free to leave comments with questions & we will be happy to address.
Q: Will I get double-taxed on my RSUs?
A: You do not get double-taxed on RSUs, although taxation may occur at more than one point in time. The general mechanics of RSU compensation are this:
- You are granted RSUs and they vest in a given year. In that year, you will see them show up on box 14 of your W2 with a code of “RSU.” You may also see equity compensation show up on box 12 of your W2 as code V.
- At the time that these RSUs are received by the taxpayer, part of them are actually sold to offset the tax withholdings, and some tax withholdings are paid using the proceeds. In states like California, where there is a state tax on earned income, part of the shares is sold for federal withholdings and part is sold as state withholdings
- The total amount of RSUs will show up as a component of your total wages on your W2. You may wonder “why is this W2 income and not showing up as a capital gains/loss item?” Well, it was given to you as compensation for services performed, and the employer shows it as such. It is a deduction to the employer that way and conveniently allows the IRS to know exactly how much you earned.
- These remaining RSUs are now yours to sell, and many choose to sell them all right away. This part, however, shows up on your 1099 from the broker that is being used for the transactions. Let’s say it is Etrade for sake of this discussion. We will use $1,000,000 as an even number for the amount you sold, and $990,000 as the Fair Market Value (FMV) at the time of the grant.
- You receive your Etrade statement and see the total sale price of $1 million in proceeds. However, you do not see your cost basis. The cost basis is also the amount of share compensation you were already taxed on at the time these shares were granted. There are several ways that this is calculated – it may be the box 12 amount mentioned earlier or the box 14 amount. Some other types of equity compensation may also justify form 3922 or 3921 to be provided by the employer.
- If you use the standard brokerage statement import on most tax software, you may end up with this basis of zero, causing you to owe tax on the full $1 million at short term (ordinary) rates, which are currently 37% on the federal side, without taking into account the amount you were already taxed on at the time of vest. This would, in effect, create a double-tax scenario, which is why it is very important to calculate your basis properly. The amount of capital gains in this example would only be $10k, which is computed by subtracting the basis of $990k from the total sale price of $1 million.
- Why does it say zero on the brokerage statement? This is because your basis in the shares is the Fair Market Value at the time they were granted, which is the amount of income that you were already taxed on at the employer level. The broker may not know this amount, so they put zero as your cost basis.
- Sometimes, the employer will provide data showing how much was granted and the Fair Market Value at the time of the grant
- The basis may be quite a bit harder to calculate the longer the shares are held, as the taxpayer may not have the records necessary to compute basis. Also, the grant date may be hard to discern. However, long-term capital gains are taxed at a more favorable rate than ordinary income, so if you believe in the company, it may make more sense to hold onto the shares for longer than one year after the grant.
- This brings me to another point: long-term vs. short term gains. Long-term are capital items (like RSUs) that are held for more than one year after they were granted/obtained. This rate is 23.8% (20% plus the 3.8 tax on net investment income for high-earning taxpayers). On the other hand, the rate for short term gains is the same as that for earned income, which is 37% for high-income taxpayers. With this in mind, it may make more sense to hold onto these investments from a tax perspective if you truly believe in the company. However, this is an investment and tax/life planning decision that one should make on their own.
- The takeaway here is that you must calculate and report your basis in order to avoid double-paying Federal and State (if applicable) taxes.
Q: What happens if I am granted stock options when the Fair Market Value is at a market high and I am taxed on them, only to have the value drop prior to me selling these shares on the open market?
A: This turns into regular income at the time of grant and a capital loss at the time of sale. To put this in form language, this results in income on the W2 and a loss on the 1099-B. I have seen this in instances prior to a buyout or other event that temporarily inflates the stock price at the time that shares are granted. Then, some time later, the taxpayer chooses to sell the shares, leading to a short term capital loss. If the loss is high, the taxpayer may not have enough capital gains income to offset the loss and can only use $3000 of it on their tax returns each year and carry forward the remainder.
Q: I did not report my RSU income and received a CP2000 letter. What do I do?
A: This is extremely common. A CP2000 letter is a letter of adjustment that the IRS gives to taxpayers when items are missing from their return. This commonly happens when a taxpayer is missing 1099 information, such as 1099-B Brokerage statements.
Taxpayers are told by their company at the time that shares are granted that part of the shares are sold to offset taxes. Some may shrug this off and think to themselves that the tax end of things has already been taken care of by the firm. They complete the return on their own on TurboTax using the W2 only and don’t bother looking for anything on the brokerage side under the erroneous belief that anything tax-related for the shares has already been reported accordingly on the W2. Four months later a letter comes in the mail with a large tax bill – usually the tax bill is the actual amount of the share sale price, regardless of the basis. From our prior example, the tax assessed would be based on $1 million of income, rather than the $10k of actual capital gains that occurred. Clearly this amount is far more than one would expect. This is when our practice gets calls from taxpayers receiving such a notice – they normally say the same thing: “The IRS is trying to tax me on money that was already taxed. My employer already sold shares to cover this tax, so I do not understand why the IRS is asking for tax on this again.”
The reason is because of the basis reporting. Earlier in this article I mentioned that the brokerage will report zero as the cost basis in many cases where RSUs are sold. Well, the taxpayer is not the only party that receives this 1099 with no basis reported. The IRS also receives the same document. Without having a basis number, they simply assess the tax, plus interest and penalties, on the full amount of the stock sold, not knowing how much was already included in your W2 and taxed as regular compensation.
The solution to this issue that we offer at our firm involves completing a response package to the IRS containing a format letter, information related to the return, backup, and possible amended return. Our success rate for this is 98% on the first attempt to address & we correct this issue virtually for clients in all 50 states.
Steps involved, depending on the exact circumstance, involve re-computing the amount of schedule D gains and losses, asking the client for relevant information to substantiate the basis, possibly amending the return with “CP 2000” specified at the top as per IRS instruction, and writing a letter of explanation on behalf of the taxpayer showing documents to explain the basis and asking for an adjustment to their adjustment. The taxpayer may have to write a check for a balance (and in some cases where the share price dropped, may even be entitled to a refund).
None of this material is tax, legal, or investment advice and is only conversational material provided for discussion purposes only. For professional advice, contact us directly at hello@dimovtax.com or using the contact form below:
Thank you so much. I’m using TurboTax and could not figure out why importing my 1099s from Fidelity caused my return to plummet. Thanks to this document, I discovered that the Cost Basis was 0, and needed to be updated based on the figure in box 12 (code V). This just added about $2,000 back to my return. Thank you so much.
Really great information, thanks for the share and insights! I will recommend this to my friends for sure.
Thanks so much. I just got the letter yesterday with huge tax bill and bumped into this article today…Hope my tax bill not be as high as stated in the cp2000 but just based on the capital gain.
I am from the UK. I work in the US on a work permit. I have received some R S U’s, The grant date was 01/06/2015, the vest date was 01/06/2019.
I have had wax withheld from the R.S.U’s for both HMRC and IRS. I have not taken the money yet. I am confused as to why UK tax gets involved at all as the shares are basically income from employment and surely should be taxed under US tax law! If I choose not to take the money now and leave it for a while then I appreciate that would be a capital gain and taxed under UK tax law.
I would appreciate your thoughts.
This fact set brings up a list of questions & some discussion:
–What was your date of move to the US?
–When do you expect to leave the US?
–What brokerage account is holding the shares?
–Do you believe in the upside potential of the RSUs?
I will contact you directly by email as this is a complex topic and there is potential for error here if not dealt with appropriately.
You are very knowledgeable RSU’s and tax implications. My husband’s employer add RSU’s to his taxable income and it produced a big tax bill. Our tax preparer with H&R Block didn’t know anything about them to educate us.
We need a CPA in the Denver CO area that could help us with this for our 2019 filing. Can you recommend someone in the area?
Hi Brenda
We actually have many clients in Colorado & will be more than happy to assist. We can even provide CO state references. Please expect our email at this time that will list out next steps. You can upload your W2s and 1099s to our secure portal and we will do the work for you right away. Much appreciated.
Great information – thank you George. Does the one-year clock that determines whether a capital gain is treated as short-term or long term start on the a) Date of Grant, b) Vesting Commencement Date or c) actual Vesting Date (i.e., one-year anniversary, two-year anniversary, etc.)?
The legal determination & what ends up being reported by the broker (administrator of the company equity program) may be two different things! Let’s chat more on email – I will message you now.
Great info,
My RSU’s which vested and I sold does not show the cost basis on the 1099-B form but shows in the supplemental info of the tax document. I used this to adjust the cost basis. My W2 does not have any info in box 12 or 14. Will this create any issues with the IRS when filing? Shares were sold at the time of vesting to cover the taxes. I’m using TurboTax.
Hi Kevin, I will reach out to you by email now. Generally, however, RSUs’ fair market value upon vest date is automatically added to your box 1 amount on your W2. Most companies “sell-to-cover,” which means that part of the RSUs are sold. You will see this on your vesting schedule. I will email you now about the basis adjustments, forms 8949, schedule D, etc.
Kevin – did you ever get your question answered? I have the exact same question. Thanks
I just sent you an email – please check your spam folder or otherwise reach out to hello@dimovtax.com
Thank you for the great information. One thing is still not clear to me. For example, in my case, the vested company RSUs are 130 shares. The company deposited 85 shares to my broker account and used the rest 45 shares as tax withholding. I saw the entire 130 shares’ fair market value has been added into my W2 total income, just like you mentioned above, but the tax withholding, i.e., the 45 shares’ value, was not shown in W2’s tax withhold. That is to say, that withholding amount (45 shares) was not added into the total withholding in W2. How do I include this withholding into my tax return filing? By the way, there are no any info in box 12 or 14 related to this either.
You will need the brokerage form provided, not just the vesting schedule, as well as forms 8949 adjustments. I will email you now with some details – please check your spam folder if you do not receive my response.
I wanted to add to the question. If one had 130 RSUs and 45 were sold to cover the tax amount then what would one list for the Cost Basis on the tax form? The cost of all 130 at the sale price or the cost of the 45 at the sale price? Because it seems like the tax was already on the full 130, but putting the cost basis on the 130 causes a large capital loss to show.
Hi! I believe I replied to your email. Did you see my response from earlier today? Please email me directly at george@dimovtax.com if you have questions.
Hi can you send me the brokerage form and 8949 too for my RSUs. I’m having the exact same issue as Jim
Hi!
Thank you for your message! Happy to assist with your 8949 for the RSUs. Can you send me your W2 and 1099-B from your brokerage? If you also have a vesting schedule from your company, that can also be helpful.
Hi George,
I’m having the same problem. Every time shares were vested they took out a certain amount of them for taxes but still showed the full amount in my taxable income. I just sold some RSU’s last year that vested in 2011 which makes it even harder to track. Would appreciate if you could send me those forms.
Thank you for reaching out! Please message me at george@dimovtax.com and I will send you the checklist of items to have ready for this type of return.
Hi George,
I’m in the same situation as Jim above. How do I add this tax withholding into the filling? Can you please advise and send me some details?
Thanks,
Tuan
Hi! I just messaged you by email as I have a few questions to help determine next steps.
Hi George,
Can you please send me details as well? Its about tax withholdings and if not reported on w2, how to report it ?
Hi! Just saw your message. Please contact me at hello@dimovtax.com and we can speak.
Hello,
I made a mistake last year where I entered 0 as the cost basis for my RSUs. I have since corrected. However, now looking back multiple years, I see that in 2016 I have RSUs that vested, that I did not sell until 2018. However looking back through my tax documents from the broker I still have a 1099-B for 2016. Do I need to report the vest if I did not sell the stocks? The reason for the confusion is there are no capital gains/losses to report since I did not sell… however I still received a 1099-B. These stocks were then sold in 2018
Hi Kurt,
Thank you for your message! Generally speaking, you will only receive a 1099-B in the year you sell your RSUs. When RSUs are vested, it will only be included in your W2 as ordinary income. However, we have seen the company submitted a 1099-B to the IRS by mistake for RSUs vested. We need to take a look at your documents and tax return filed to determine how it should be fixed. Please let us know if you have any questions.
Hi George,
Thanks for the great info and clear explanation. One related question — my 1099B lists the sales to pay taxes and the sales where I received money. As I enter these transactions into Turbotax, even the sales made solely to pay taxes cause my tax due number to increase. Can you explain how that is possible? If I sold RSUs and used 100% of the proceeds to pay taxes, how can reporting that fact cause me to owe more tax?
Thanks!
Thank you for reaching out.
You must adjust your basis using the fair market value of the shares at the time of vesting. You do this using forms 8949 and schedule D. Do you have your vesting schedule available?
Hi George,
My husband received RSUs from his employer that vested in June and we sold in June. However, the company they deal with is a wholly Hong Kong-based company and they do not send a 1099-B. They don’t send 1099-B for stock sold that we buy through payroll deduction either. I have researched and on TurboTax it says to select RSU’s when entering the info, but when I select Stocks sold, the next screen asks how they were acquired and there is nothing to select RSU (it shows Gift, Inheritance, Bought, etc). I’m so confused how to figure this all out! Thanks for any help you can give. 🙂
Hi!
Thank you for your message! This is something that will have to be prepared through professional tax prep software. Happy to complete this return for you, should you choose. We see this often with our clients in Hong Kong, Singapore, Sweden, Holland, etc. Please contact me directly at george@dimovtax.com
My husband receives RSU as part of his yearly compensation package. We received the 1099-B form and almost all is being considered short term gain. The company is using the exercise date as the acquired date (not the grant date and not the vesting date). Is this correct?
Are you noticing that there is a difference between the acquired date & the vest date? Do you have a copy of the vesting schedule so you can compare? Generally speaking, the acquired date & vesting date should be the same.
Hi,
I have been issued RSU 1500 shares on 19-Jan-17 with vest date on 19-Jan-20. At the time of grant I was working for the company in India. But I have been transferred in same company on 16-Jan-2020 to USA.
My question is weather I will be taxed in India or USA?
My company is saying i will be taxed in India but I debating with them saying it will taxed in USA.
Also on price of share on vest date was $40 but it dropped to $12 on 19th march which can just cover up the taxes. what I suppose to do?
Can I asked to revoke grant now?
Please advise what should I do?
Hi!
Thank you for your message! The income for RSU is usually taxed in the jurisdiction of residence at the time it was granted. When it thereafter vests, you would generally be responsible for the taxes in that original location. However, you will likely also meet US tax residency rules, which means you would be reporting it on the US side, as well, and then taking the “foreign tax credit.” We see this often with clients not only from India, but with ones that worked for Uber or other tech companies while living in Netherlands, Sweden, Denmark, etc.
If the price dropped, you are still liable for taxes based on the fair market value at the time of vest (not price at grant and not price at sale). However, you would receive a capital loss if you sold the stock at a lower valuation that you can use in future periods.
None of this is professional advice and may actually be incorrect depending on your circumstances – if you want more details, you must schedule a consultation by emailing hello@dimovtax.com
Hi George, in 2019 I relocated from CA to CO after receiving three annual RSU grants (each vesting quarterly over 4 years) in CA. I understand that the grants awarded in CA will continue to be taxed by CA. For 2019 I revived two state W2s for both CA and CO, however, when adding up the wages for both states it exceeds my total federal wages in Box 1 (by the exact amount of the 2019 vests which are eligible for taxation in CA). Essentially as I had residency in CA for part of 2019 I’m wondering if I need to pay double taxes (For both CO and CA) on thIs same portion of RSU wages. I would assume this would normally result in me being able to claim the CA portion of the tax paid as a credit on my CO return but I’m stuck trying to understand why the state level W2s both include the same RSU income. Wondering if there is something special to do when filing to avoid double taxation or alternatively if this is just something I have to do for 2019 due to the relocation and partial residency in both states?
Hi Sachin,
The only way I can provide some assistance for this is to look at your W2s. There are several ways to solve this common issue & we specialize in this matter. To provide some background:
When shares are granted at the beginning of a 4-year vest cycle, they often end up being shown as income from that state (or even country) for the next years after you leave to another state. This causes many clients to have to file multi-state returns. Also, when moving, many payroll departments may show the same gross income in both states, requiring multi-state allocation or credits for taxes paid to other states. Some states, such as NY, require that full box 1 is also displayed on box 15, which adds to the confusion.
There are several solutions to your issue:
–Multi-state allocation through adjustment/override of box 16 W2 amounts
–Credits for taxes paid to other states
–W2C from employer
Please contact us directly at hello@dimovtax.com with copies of your W2s and we can help you resolve this.
Hi George !
If you are a part-year NYC resident who had RSU’s granted while you were a NYC resident, do you owe NYC tax on them if they vest while you are living in another state? I know you owe NY state tax but I can’t find anything stating whether you owe NYC taxes as a non-resident.
Thanks !
Hi!
This is not professional advice until you are a client, but you generally would not be liable for city taxes. This is because although RSUs require state-source reporting for the state at vest, most city taxes are based on residence. The same would apply for Philadelphia or Detroit, for instance. Does that help answer your question?
HI,
I got some RSU’s granted in USA which vests in 4 years, I was in US for 3 years, 0.8 years in Canada and 0.2 years in India. The last vest happened at 4 year time when is was an employee in India. Do i need to pay Canadian taxes also ? these RSU’s were neither granted nor vested in CANADA.
Hi! That is a great question for our senior Canadian team. I will respond to your inquiry now directly over email & as I have a few more questions for you.
Hi,
My RSU was vested and sold 02-22 and 02-23 respectively. My paystub says $8,000 and taxed, my 1099-B says proceed was $3,000 and cost basis of 0. Will my cost basis in schedule D be $8,000?, $5,000? $11,000? If not, what is?
Thanks,
Hi Rudy,
That is a great question. I would need to take a look at your 1099-B in order to guide further. If you want, you can send me your 1099-B, W2, vesting schedule, and pay stub to hello@dimovtax.com. Please let me know if you want access to the portal if you prefer to upload securely. I can then take a look & let you know. We are licensed in CA (I see you messaged from SoCal), so feel free to email, text, or call.
Greetings, wanted to ask what happens if you are receive a 1099 MISC for RSU’s granted in a particular year. In this case, would there be tax withholdings required to be withheld by the company?
Thanks so much.
Hi,
Thank you for your comment! Generally, if a Form 1099-MISC is issued, no tax will be withheld for RSUs. You will have to pay estimated tax on your own to avoid the underpayment penalty. If you are interested to know more about when, how much and how you can pay the taxes, please feel free to reach out to us at hello@dimovtax.com. We are happy to assist!
I did not report my RSU income, have just received a 1099-B + transactions supplement; I also did not report 1099-INT income (nominal). Wise to submit an amended return now? Or better to wait on the CP2000 notice?
And yes, the IRS has already accepted my federal return. State return has also been accepted; I’m in California.
Thank you for your message & thank you for reaching out. I am licensed in the state of CA (license 131628). The IRS and state require that an amended return be filed anytime that an error or omission is discovered. They require that such an amendment be filed “as soon as possible.” Does that help answer your questions? Did you want us to handle the amendment for you? Please message directly at george@dimovtax.com and we will handle right away.
Hi, I need help filling my taxes, could you send me an email to know what the cost is for getting assistance on this? I have a regular salary and I also got some RSUs last year which I haven’t sold. I also did some Stock and Crypto buy/sell last year through a few brokerage services.
Hi! Just messaged you from george@dimovtax.com. Did you receive my email response?
Hello, I have a question similar to Aaron above (from Feb 15, 2020). Let’s say you had 130 RSUs, and 45 of them were sold to cover the tax amount at the time of vesting. So, you received only 130-45 = 85 shares. When you sell those 85 shares, what is the cost basis? Is it the FMV (on grant date) of 85 shares, or is it the FMV (on grant date) of all 130 shares?
Hi! Please send over your 1099-b, W2, and vesting schedule and we can speak. Feel free to share securely with george@dimovtax.com
Very useful. Succinct explanation of taxation on RSUs. I have a follow up for clarity. I moved back to India in 2019. For the FY 2020, I had RSUs vested and a portion of shares were sold to cover taxes. In my W2 form I see only the RSU income (Box 14) and a small portion of it as tax withheld. To avoid double taxation how would I report the tax already paid using the shares sold? If I enter the information from W2 and also upload 1099 forms, I see a hefty amount as tax I owe.
I have not sold any shares vested. Portion of shares were sold to cover taxes and I was living in Washington state. Your guidance would be appreciated, George.
You must make sure you are using the correct reporting basis. If you need more information or assistance with this return, email me at hello@dimovtax.com. Much appreciated!
My pay statement says “RSU Tax” and then shows it as Income. There is a separate line on the pay statement showing the Income from the vesting of RSUs. I also get SARs. Do you know why I have Income that is called “RSU Tax”?
Did you already contact your compensation department at work to ask? SARs are stock appreciation rights and are another type of equity. I looked you up on linkedin and see you are a divorce planner – did you need assistance with any specific client situation? We have many clients that we work with coordinating equity allocation if you are interested in collaborating. Email is here: hello@dimovtax.com
Hello, thanks for this blog. I received my RSU grant in New York but moved out to CA 6 months later. Does NY use Allocation Ratio, similar to CA, to calculate it’s share of state tax on RSU’s vesting after I’ve moved out? Thanks.
Hi,
Thank you for the message! Yes, NY uses a similar allocation method for RSUs. Do you need help with that? We are licensed in both states & specialize in this exact situation. We are happy to assist.
Hello – I received 430 RSU in July 2021 while residing in NY State. I moved to FL in July 2022. The vesting schedule calls for 50% vesting in July 2023 and July 2025. I just received the first 50% in July 2023 and NY taxes were withheld. What is my tax obligation to NY State given that I am receiving the vested RSU as a non-resident? Thank you so much.
Hi,
Thank you for your message! We are happy to assist you. I will reply via email.