Should RSUs sold to cover tax be subject to capital gains tax if they were only sold to cover taxes in the first place? They never were before and I did not cash out.

[murreweet]

I saw a capital gains tax of one way more than my return as ever been before and I’ve had RSUs for 10 years. I’m figuring it was a processing error because I didn’t get any of that money in my bank account except the usual difference. Is the difference subject to capital gains? If so, why is the tax 4x higher than the difference itself?

[GeorgeM777 · Accepted solution]

It depends whether the RSUs "sold to cover" were subject to capital gains tax.  If the RSUs that were sold to cover the withholding were sold at a price greater than the price assigned on the vesting date, then yes, you have a capital gain, and such gain is subject to a short-term capital gain tax.

Ordinarily the sell to cover is done at the same time as vesting so that there is no price movement in the underlying stock.  However, we don't know how long your company waited until selling the RSUs for withholding purposes.  Had they waited some period of time, and the underlying stock increased in value, then when those shares were sold to cover, you would have a short term capital gain.  

If you can provide the numbers regarding the tax, and the value of the RSUs that vested, and the amount that were sold and the gain, that would help us to better understand your tax situation.  

@murreweet

[murreweet]

Ignore this comment; page won’t let me delete. 

[murreweet]

There were 3 vest dates in 2022. 
1st: 20 units vested at $112.24 FMV, 20 sold to cover. Net proceeds: 0 shares. 

2nd: 20 units vested at $106.21 FMV, 20 sold to cover. Net proceeds: 0 shares. 

So does that mean I technically got zero compensation for those 40 shares? If so should I be talking to my employer?

3rd: 20 units at FMV of $102.11, 8 sold to cover US Fed income tax, SS, Medicare, State Income. $816.89 withheld in total. Net proceeds: 12 shares (so 1225.32). 

For each of these fed tax is 22%, SS is 6.2, Medicare is 1.45, State is 7, refund is 0, even if there is a dollar amount listed. So that means I shouldn’t have any capital gains tax because I already paid all taxes, right?

 Mathematically I don’t see how over $5k in “gains” is subject to tax if I didn’t receive anywhere near that amount and the value actually went down. 

[murreweet]

Ignore this post. For some reason the site deleted the one I meant to post and the website had to be reloaded. 

[murreweet]

Thanks for the info. The shares were sold to cover on the date they vested, so there really should be no change. 

I also know that my company split their stock by  10 or more since these were granted, so each one was theoretically worth 10x what the new cost basis was. I wonder if maybe there’s some confusion there? I would’ve assumed that would have been part of the calculation. 

Fidelity didn’t even have a capital gains form to give me so I’m not sure how TurboTax even got that information. In the 10 years I’ve had RSUs I’ve never seen a form like that. (1099-b, I think.)

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[GeorgeM777]

If your company did a 10-for-1 stock split, you should have ten times the number of shares you originally received.  However, your original per share cost basis needs to be adjusted to reflect the fact that you have ten times the number of original shares.  Thus, divide your original per share cost basis by ten, which will give you the post split per share cost basis.   The amount of the original cost basis does not change in a stock split, but what does change in the per share cost basis.  

Your original cost basis is the value of the shares on the day they vested.   So if you sold some shares, you should calculate the per share cost basis.

Fidelity probably won't know your cost basis, so you will have to enter that information.  Sometimes, firms will include a zero as the cost basis, and that is why we inform taxpayers to adjust their cost basis if necessary otherwise they will owe more tax than is required. 

@murreweet

[murreweet]

Thanks! 

I actually wound up calling my HR department and long story short, Fidelity wound up talking to me and basically said the same thing in that my cost basis was wrong. It took me over an hour to figure out how to get to the right place, but it worked out.

With my plan, they have an adjusted cost basis (as a courtesy I believe) so that when you sell to cover, you don’t wind up having to pay taxes twice.

It seems I entered the real cost basis and not the adjusted which is why TurboTax calculated the way they did. So lesson learned. I didn’t understand the instructions in relation to TurboTax. 

To anyone else who sees this and has the same issue, I suggest considering calling your broker/servicer and seeing if you need to enter the cost basis differently.