How to File Taxes on RSU Sales: A Step-by-Step Guide
Selling RSUs (Restricted Stock Units) can make your tax return a bit more complicated, but it doesn’t have to be overwhelming. If you’ve sold RSUs this year, getting your taxes right is essential to avoid paying extra or triggering an IRS inquiry. Here’s a step-by-step guide to help you file accurately and confidently.
What Are RSUs and How Are They Taxed?
RSUs are a type of stock-based compensation your employer grants you. When your RSUs vest, you officially own the shares, and their fair market value at vesting is included as income on your W-2.
However, there’s more. If you sell those RSU shares, you may owe additional taxes on any changes in the stock price since vesting. In short:
When they vest: You’re taxed on the value of the shares as part of your ordinary income.
When you sell: You’ll report a capital gain or loss based on how the stock’s value changed after vesting.
The goal is to ensure you don’t pay tax twice on the income you already reported when the shares vested.
Step 1: Gather All Your Documents
Before you dive into your taxes, make sure you have everything you need:
Your W-2: This will show the value of your RSUs at vesting (look for it in the wages section).
Form 1099-B: Your brokerage provides this and it lists details of the stock sales, including sale proceeds and cost basis.
Supplemental Documents: This helps confirm vesting dates and values.
Transaction History (Added Precaution): From your brokerage, including the dates and proceeds from each sale.
Step 2: Check and Adjust Your Cost Basis
One of the most common mistakes with RSUs is not adjusting the cost basis when reporting the sale. The cost basis represents the original value of the stock when it was taxed as income. Unfortunately, brokerage statements often use a default cost basis of $0, which isn’t correct for RSUs.
Here’s what to do:
Compare the cost basis on your 1099-B with the stock's fair market value on the vesting date.
If underreported, adjust it to include the amount already taxed at vesting. You can find this information in the Supplemental documents as described above.
Example: Let’s say you had 10 RSU shares vest at $100 per share. The $1,000 value was included in your W-2 as income. Later, you sell all 10 shares for $120 each. Your 1099-B might show a cost basis of $0, which would incorrectly suggest a $1,200 gain. Instead, you should adjust the cost basis to $1,000, so your taxable gain is only $200.
Step 3: Report the Sale on Your Tax Return
Here’s where things get a little technical. To properly report the sale:
Use Form 8949 to record the details of each transaction:
The sale proceeds (what you sold the stock for).
The adjusted cost basis (what the shares were worth at vesting).
The gain or loss (difference between sale proceeds and cost basis).
Transfer the totals from Form 8949 to Schedule D, which summarizes your capital gains and losses.
If you sold your RSU shares immediately after vesting, your gain or loss will probably be small because the sale price and vesting price should be similar.
Step 4: Check Taxes Already Withheld
When your RSUs vest, your employer usually withholds some taxes upfront. These withholdings cover federal, state, Social Security, and Medicare taxes and are included on your W-2. However, they may not cover all the taxes you owe, especially if the stock value increased significantly between vesting and when you sold it.
To avoid surprises, double-check your tax withholdings and calculate whether you might owe additional taxes.
Step 5: Handle Any Losses (If Applicable)
If your shares lost value after vesting and you sold them at a lower price, you’ll have a capital loss. You can use these losses to offset other gains, and if your losses exceed your gains, you can deduct up to $3,000 from your ordinary income.
Common Mistakes to Watch Out For
Not Adjusting Cost Basis: This is the most common issue and can result in double taxation.
Missing Taxes Already Paid: Make sure you account for the taxes your employer withheld.
Skipping Form 8949: Failing to report your RSU sales properly could raise red flags with the IRS.
Final Thoughts
Filing your taxes after selling RSUs doesn’t have to be stressful, but it does require careful attention to detail. By organizing your documents, adjusting your cost basis, and reporting everything accurately, you can avoid costly mistakes and ensure you’re not paying more tax than necessary.
If you’re unsure how to handle RSUs or want professional guidance to optimize your tax strategy, we’re here to help. At Fortitude Financial Planning, we specialize in working with tech professionals and entrepreneurs, offering tailored tax preparation and comprehensive financial planning services.
Ready to get started? Reach out to us today to schedule a complimentary consultation and take the stress out of managing your finances. Let’s work together to ensure your equity compensation works for you—not against you.
