What are rsu shares

what are rsu shares

Adam Gering. Full Stack Entrepreneur

A Restricted Stock Unit (RSU) is not a stock or an asset subject to capital gains taxes. It is essentially an I.O.U. using the company's stock as the unit of accounting. It is often payable in cash in lieu of stock.

A primary feature of an RSU is that it is not taxed when granted, and has the compensation payout characteristics of actual stock or a zero-strike-price option without the negative tax consequences. I believe the reason it is not taxed upon grant is that individuals are taxed on a cash basis rather than an accrual basis; and an RSU is basically a receivable.

An RSU is taxed when it vests (payroll tax) and when you receive the shares (or cash) it represents (ordinary income).

From that point on will get capital gains tax treatment on any future gain or loss when realized, as you now have shares in the company (if paid in shares), with a tax basis of its fair market value when you received them (and upon which you paid ordinary income taxes).

If you had wanted RSUs subject to long-term capital gains upon grant, then you would just receive restricted stock instead. Restricted stock would be taxed upon grant (if you file an 83(b)) or upon vesting (if you do not) as ordinary income, unless you purchased the shares at fair market value; and you'll again receive capital gains tax on the future appreciation, but from the much earlier date and lower tax basis.

The only vehicles that receives only capital gains tax treatment are either Restricted Stock which you paid fair market value for; or Incentive Stock Options; both have disadvantage of paying the purchase or exercise costs a year before you can get long-term capital gains treatment.

Here's a simple comparison of the different forms of deferred equity-based compensation:

Restricted Stock Units (RSU):

1) Upon grant: No tax

2) Upon vesting: Payroll tax

(even if receipt of shares is deferred)

3) Upon receipt of shares: Ordinary Income (Fair Market Value (FMV))

4) Upon sell of shares < 1 year: Short-Term capital gain (only on appreciation over basis from step 3)

5) Upon sell of shares >= 1 year: Long-term capital gain (only on appreciation over basis from step 3)

Unrestricted stock and restricted stock with an 83(b) election:

1) Upon grant: Ordinary income

2) Upon vesting: No tax

3) Upon receipt of shares (see above)

4) Upon sell of shares < 1 year: Short-Term capital gain (only on appreciation over basis from step 1)

5) Upon sell of shares >= 1 year: Long-term capital gain (only on appreciation over basis from step 1)

Restricted stock without an 83(b) election:

1) Upon grant: No tax

2) Upon vesting: Ordinary Income

3) Upon receipt of shares (see above)

4) Upon sell of shares < 1 year: Short-Term capital gain (only on appreciation over basis from step 2)

5) Upon sell of shares >= 1 year: Long-term capital gain (only on appreciation over basis from step 2)

Incentive Stock Options (ISO):

1) Upon grant: No tax

2) Upon vesting: No tax

3) Upon receipt of shares (exercise): No tax (but requires payment of exercise costs; a cashless exercise involves step 4 and will be taxed) - Alternative Minimum Tax (AMT) may apply

4) Upon sell of shares < 1 year: Short-Term capital gain (on appreciation over exercise price)

5) Upon sell of shares >= 1 year: Long-term capital gain (on appreciation over exercise price)

Nonqualifying Stock Options (NSO):

1) Upon grant: No tax

2) Upon vesting: No tax

4) Upon sell of shares < 1 year: Short-Term capital gain (on appreciation over basis from Step 3)

5) Upon sell of shares >= 1 year: Long-term capital gain (on appreciation over basis from Step 3)

Source: www.quora.com

Category: Forex

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