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Let's Play a Game
How many of us really understand RSU taxation?
It's a big chunk of our compensation.
But what we think we know about them might be far away from reality!
Personal Finance
Do you really understand RSUs?
How "breaking even" on your stock grants can still trigger a hefty tax bill.
The Grant (2023)
Your company grants you, in 2023, $10,000 worth of RSUs.
Granted at a price of $40.
You will get 250 shares. 😁
The Vesting (2024)
You vest (i.e. get) them after 1 year in 2024.
The price on vest date is $20.
You are super sad! You just lost 50% value. 😭
The "Recovery" (2025)
But, then, 1 year later, in 2025, the price goes back up to $40.
You feel better, at least you broke even. 😐
You decide to sell it, and take your money.
The million-dollar question:
Do you owe taxes on this "break-even" sale?
The Plot Twist
Yes, you absolutely owe taxes. Sadly!
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The Two-Identity Tax System
The system works this way because RSUs are compensation first, and an investment second.
Tax law splits you into two identities:
You as an Employee:
Taxed on the value of the shares when you receive them (at vesting).
You as an Investor:
Taxed on the growth of the shares from the moment you received them.
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Event 1: The Employee Gets Taxed (Vesting)
When your 250 shares vested at $20, the tax man saw a $5,000 bonus.
This triggers immediate income tax (let's use 45%).
To pay it, brokers "sell-to-cover".
Also, now you actually "own" the shares.
Taxable Income: 250 × $20 = $5,000
Income Tax: $5,000 × 0.45 = $2,250
Shares You Keep: 250 * 0.55 = 137.5 shares
The 137.5 shares you keep now have an official cost basis of $20 per share.
2
Event 2: The Investor Makes a Profit (Selling)
When you sell your remaining shares for $40, the system looks at cost basis.
And since you started "owning" the stocks only on vest date,
They take the vest price as cost basis!
Sale Price: $40/share
Cost Basis: $20/share
Capital Gain/Share: $40 - $20 = $20
Total Capital Gain: $20 × 137.5 = $2,750
Check your contry's capital gains tax rate and its tax free threshold to calculate actual payable tax
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Why Isn't This Fairer?
But, but, this is unfair!
You were granted something at a price, and you sold at the same price, made exactly 0!
Paying taxes on that? That feels like a travesty 😭
Proposal: The "Common Sense" Model
The 'Fair' Idea:
The grant-to-vest "loss" should be recognized.
Pay income tax on vest price, as usual.
But, still allow the capital loss when vest price < grant price
There's no reason why we can't do this!
It would be hard to convince the Finanzamt though! Nobody likes loss of tax revenue.
Verdict:
Seems complicated, but so is the entire tax code!
This is what I expected the default behaviour would be!
So did my friends when I spoke to them.
But, apparently common sense is not so common in tax law.
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The Upside: The Growth Scenario
This system fares much better when your company's stock appreciates.
Let's imagine a timeline where you are granted 250 shares at $40.
They vest at $60, and you sell at $100.
| Event | Calculation | Taxable Amount | Tax Type |
|---|---|---|---|
| Vesting | 250 shares × $60 Vest Price | $15,000 | Ordinary Income |
| Selling | ($100 - $60) × 137.5 Shares Kept* | $5,500 | Capital Gains |
*After selling ~45% for taxes at vest, you'd keep ~137.5 shares.
The capital gain is ($40 profit/share × 137.5 shares).
The Lightbulb Moment
Notice your capital gain is calculated from the $60 vest price, not the $40 grant price.
But, Don't worry! the tax department benefits too from this appreciation.
The $20 of growth that happened before you owned the shares increases the income tax they get.
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The Five Stages of RSU Tax Grief
😵 Denial
"This calculator must be wrong. I broke even!"
😡 Anger
"The grant price was $40! Why doesn't that matter?!"
🙏 Bargaining
"Can't I just write off the loss I just had?"
😔 Depression
"What is wrong with the system!"
✅ Acceptance
"Well, I guess I'll have to find companies where stonks only go up!" 🤷📈
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Your Action Plan
I only truly realized this last week. Before I was blissfully unaware!
And after speaking with friends, I realized this confusion is widespread.
That's why this post exists! I wish I had seen this 2 years ago!
Here's what to do next, so that you know if you are in for a shock:
1
Find Vesting Statements
Log into your stock plan administrator (E*TRADE, Morgan Stanley, etc.)
Download the PDF statement for every single RSU vest.
2
Identify Your Cost Basis
On each statement, find the "Fair Market Value" on the vesting date.
This price is the official cost basis for the shares you kept.
3
Track Everything
Keep these PDFs and a simple spreadsheet.
Record the vesting date, number of shares kept, and the cost basis per share.
Your future self will thank you.