When you’ve got stock in a company, it’s normally a really, really good thing.
Especially RSUs (or restricted stock units). They’re stock you get just by working in a company…. Ones you don’t even have to pay for.
And any time those RSU shares “vest”—meaning the company hands ownership of them over to you—you become a wealthier individual.
But then… of course… as is with any form of “income,” the ATO wants their share too.
Which is why you so often hear the term “cost basis” associated with RSUs. Since you don’t actually have to pay for these shares, this is what the ATO uses to assess their value, so they can figure out their worth… and therefore know how much you owe on them.
And most often, cost basis is the purchase price of an investment. Or, if we’re talking about RSUs you didn’t have to buy… the market price that they were on the day they vested.
How RSUs Are Normally Granted
In most RSU agreements, you get a grant of RSUs expressed as a set dollar amount.
So if your company grants you a $400,000 total value and the shares of your company are worth $10 each at the time of grant, that means you’re granted 40,000 shares.
But, you probably have a vesting schedule divided up over the course of four years, that means you get 10,000 shares per year. (Or a $100,000 value each year.)
Why Your Vested RSUs Cost You Money at Tax Time
However, since your vested RSUs are granted to you and you don’t have to pay for them, they’re considered income when they vest, rather than an investment expense.
So, if you vested 10,000 shares at $10 each, that’s $100,000 of value you received, which means that money will be taxed like ordinary income, just like your salary and your bonuses.
And this is really important to keep in mind, because most likely, your company won’t withhold enough to cover the extra amount you’ll owe in taxes.
So for all intents and purposes: go ahead an expect that any vested RSUs will cost you money come tax time in July at the end of the financial year.
Future Taxes on Vested RSUs (Why Cost Basis is So Important)
Now that the vested shares are your property, the cost basis (or market price on the day of vesting) comes into play in figuring out the taxes you’ll owe on them in the future.
So, if the price of the shares goes up, the difference between the cost basis and the current increased price will be considered a capital gain, and that’s what you’ll be taxed on when you sell the shares. (However, if you hold onto these without selling for more than a year, the gain is taxed at a discount capital gains rate).
But, if the price goes down, it’s considered a capital loss (even if you didn’t pay for the shares in the first place). And if you’re registering a capital loss with these shares, they can be used to offset your capital gains in other investments.
Do You Ever Need to Adjust Your Cost Basis?
Sometimes people get confused about this, because there are so many moving parts to taxes, especially when you’re talking about IPOs and shares and capital gains.
But no, you should never need to adjust your cost basis for RSU shares.
In fact, the cost basis and RSU rules are incredibly straightforward: it’s the price the shares cost for normal market buyers the day they vested into your name. That’s it. And since that piece of information will never change, you’ll never need to adjust your cost basis for regular tax calculations.
But one thing you should watch out for when filing your taxes is if your cost basis isn’t reported, or if there’s a missing cost basis anywhere. It’s more common than you think, so make sure you’re careful.
Making Cost Basis and RSU Easy to Manage… And Selling for Profit
Knowing that your cost basis for each set of vested RSUs will never change can really take a huge burden off your plate.
But since most people will have multiple vest dates for their RSUs, that can be something that gets confusing when it comes time to file your taxes… especially if you’ve had more than one set of shares vest to you under your RSU agreement.
Plus, there’s all the calculations to do about keeping or selling your shares… and whether they’re calculated as normal income or as long-term capital gains.
If you’d like some help figuring out what the cost basis of your vested RSUs will mean for you at tax time…. And some guidance on how to reduce that tax bill, get in touch for a consultation.