Sell 100% of RSU Shares When They Vest

There is no tax benefit to holding RSUs after they vest

Strategy Overview

RSUs are taxed as ordinary income when they vest, and there is no tax benefit one gets from holding the shares longer. As such, in the vast majority of circumstances, most individuals should sell 100% of their vested RSUs as soon as possible to help reduce concentration risk.

Tax Details

A common misconception we frequently hear is "I want/plan to hold my RSUs for at least a year after they vest to get the tax benefits". For all intents and purposes, this is false. Here is why:

• When RSUs vest to an individual, 100% of the value vested is considered ordinary income (e.g. 50 RSUs vest when the stock price is $100/share = $5,000 of ordinary income is generated/taxed)

• The tax basis on those shares is the stock price the day the RSUs vested (i.e. $100/share in the above example)

• Any future gains/losses thereafter would be taxed as a capital gain/loss

This Analogy May Help: "If You Got Paid a $100,000 Cash Bonus, What Would You Do With It?"

If you got paid a $100,000 cash bonus, we almost never have an individual tell us "buy company stock." But yet, when $100,000 of RSUs vest, it's not uncommon for some individuals to be a bit reticent of selling those shares (the anchoring effect and the endowment effect hard at work!). The funny thing is, both of these situations would result in the same identical outcome.

Key Benefits

• Reduce concentration risk with no (or minimal) tax impact. Due to there being no tax benefit from holding shares from vested RSUs, an individual benefits from selling those shares and using the cash in other ways (for personal financial planning needs, or reinvested into a diversified portfolio).

Key Considerations/Flags

• You may not be able to sell the day your RSUs vest. If you are not able to sell immediately (in a blackout period), you can/should (1) sell during the next open window, or (2) consider establishing a 10b5-1 plan if you are a preclearance individual.

Strategy: When to Consider This and When to Avoid It

​🟢When to Consider This Strategy:

• When you are a high-income worker who has RSUs. Every individual who has RSUs should be aware of the above dynamic (an in our opinion, follow the sell 100% after vesting strategy in nearly all circumstances).

​🔴When to Not Use This Strategy:

• If you would use cash to purchase shares in your company. While in most circumstances it is not recommended, if you are currently trying to increase your equity exposure to your publicly traded company by purchasing shares, then vested RSUs would help you accomplish this goal.

• If you don't have RSUs. The above only applies to individuals with RSUs.

🟡 Consider on a Case-by-Case Basis:

• If you were not able to sell your RSU-vested shares immediately (blackout period) and the stock price has increased considerably. The tax basis of RSUs is set at the price that the shares vested at. If you were unable to sell the shares immediately (blackout period), and they subsequently increased considerably in price (e.g. vested at $10, market price is now $15), a tax strategy/benefit does exist of holding these particular shares for 12 months to achieve long-term capital gains on the increase in price (e.g. $5/share in this example). This needs to be weighed against the increased concentration risk you'd have by not selling.

Example

• Jenny vests 1,000 shares at $50 a share. This results in:

  • $50,000 of income generated/triggered on the vesting date

  • The company sells some shares to cover withholding (e.g. 22% federal + 8% state)

  • The remaining 700 shares are put into Jenny's account, and have a cost basis of $50

• If Jenny then:

  • Sells all 700 shares at $50 the same day -> No gain or loss occurred; no taxes due

  • Waits 1 year, then sells all 700 at $50 -> No gain or loss occurred; no taxes due