Day 4: RSUs – How to Avoid Tax Shock When They Vest

Understanding the Tax Implications of Stock Options

Day 4: RSUs – How to Avoid Tax Shock When They Vest

RSUs are one of the most common forms of equity compensation, especially at big tech companies like Google, Amazon, and Facebook.

Unlike ISOs and NSOs, RSUs do not require an exercise—they automatically vest on a set schedule. But the tax rules can lead to a surprise tax bill if you’re not prepared.

How RSUs Are Taxed

RSUs are taxed when they vest, NOT when you sell.

🚀 Tax Breakdown:

✅ When RSUs vest, their full market value is treated as W-2 income.

✅ If you hold and sell later, any further gain is capital gains tax.

💡 Example:

• Chris is granted 10,000 RSUs at $50 per share.

• When they vest, the stock is $100 per share (value = $1 million).

• Chris owes ordinary income tax on $1 million—ouch.

• If he sells later at $120 per share, he only pays capital gains tax on the extra $200,000.

📌 Cited in IRC: RSUs are taxed under IRC § 83(b) (restricted stock rules).

The RSU Tax Trap

⚠️ No cash to pay taxes? RSUs create a tax bill before you even sell shares.

⚠️ High tax brackets? If your RSUs vest in a single year, they can push you into a higher tax bracket.

How to Reduce RSU Taxes

✅ Sell Shares Immediately at Vesting – Avoid the risk of stock price drops and cover taxes upfront.

✅ Request “Sell to Cover” at Your Company – Many employers allow RSUs to sell automatically to cover withholding taxes.

✅ Strategically Time Sales for Lower Tax Years – If possible, defer RSU vesting or spread out sales to avoid tax bracket spikes.

📌 Pro Tip: Some companies allow RSU deferrals, which delay income recognition and tax liability. Ask HR if this is an option.

Tomorrow’s Topic: Advanced Stock Option Tax Strategies

Now that we’ve covered ISOs, NSOs, and RSUs, let’s discuss advanced tax strategies:

✔️ AMT planning for ISOs

✔️ Using the 83(b) election for early-stage stock

✔️ Qualified Small Business Stock (QSBS) exclusions for massive tax savings

Have questions? Drop them in the comments or message me!