Capital Gains and Losses - Restricted Stock Units RSUs and Backup Withholding

Restricted Stock Units (RSUs) are a form of compensation that is starting to be used by many employers. These are generally taxed at the time of vesting, whereas employee stock options are usually taxed at the time of option exercise. The employer is required to withhold taxes as soon as the RSUs become vested.

However, if you made an IRC section 83(b) election, you will be taxed and have withholdings taken out at the time the stock is transferred to you.

When this stock vests, an employee has three choices (it is possible, however, that not all employers offer all three choices and may automatically do the "Sell to Cover" option):

  • Do a Same Day Sale and sell all of the stock. You receive the cash left over after subtracting withholdings.
  • Sell to Cover. The employer sells just enough shares to cover the tax withholding and you keep the remaining shares and can sell them whenever you want.
  • Cash Transfer. You (the employee) must come up with the cash to cover the required tax withholding amount. If you pay over the amount of cash to cover withholdings, then all of the shares belong to you and they can be sold whenever you want.

In all three options, the employer will include the total value of the vested RSU shares in Form W-2 Wage and Tax Statement, Box 1, along with the amount of your normal wages. The employer is also required to withhold both federal and state taxes. This withholding will also be reflected on your W-2 along with your normal withholdings. Do not enter any withholdings on the Form 1099-B in our program, since they are already included on your W-2.

Your "basis" in all the vested shares you receive is the amount included on your W-2 as income plus any amount you had to pay for the shares.

For the first two options, you will receive a Form 1099-B Proceeds From Broker and Barter Exchange Transactions reporting the total sales proceeds for the number of shares sold. You may receive a 1099-B for the third option if you sold any of the shares during the current tax year.

Enter the date sold and total sales proceeds from the Form 1099-B you received into the Investment Income section of the TaxAct program. For the Date Acquired, enter the date the shares vested (or "various" if you sold shares that vested at different times). However, if you made an election under IRC section 83(b) to include the value of the stock in your income in the year it was transferred to you rather than the year it will be substantially vested, the holding period would start as of the date you received the stock.

The entry for Cost or Other Basis will be the amount included in income for the number of shares sold, as well as any amount per share you had to pay. For the first two options, your entry for cost will generally be the same as the amount reported as sales proceeds. Since the stock is sold on the same day it vested, all income is reported on your W-2, so no income (gain/loss) should be reported when entering the 1099-B information. The Form 1099-B must still be reported since the IRS gets a copy of this document and will be looking for it on your tax return.

Note. If the Form 1099-B you received reports the cost basis, you must enter this figure as it is shown on the form. However, any adjustments that may need to be made to reflect the actual cost basis would need to be accounted for by selecting an adjustment code on the screen titled Investment Sales - Adjustment Codes and entering an amount on the screen titled Investment Sales - Adjustments.

You may need to talk with your employer or plan administrator to determine what exactly happened and how much is being reported on your W-2.

Note that any link in the information above is updated each year automatically and will take you to the most recent version of the document at the time it is accessed.