How To Calculate Rsu Cost Basis

How to Calculate Your RSU Cost Basis: A Comprehensive Guide

Understanding how to calculate your restricted stock unit (RSU) cost basis is crucial for accurate tax reporting. This comprehensive guide will walk you through the process, covering various scenarios and helping you avoid common pitfalls. Failing to accurately determine your cost basis can lead to unexpected tax liabilities and penalties, so understanding this is vital for anyone receiving RSUs as part of their compensation.

What is a Cost Basis?

Your cost basis is the original cost of an asset, which is used to calculate your capital gains or losses when you sell it. For RSUs, this isn't as straightforward as simply looking at the purchase price, as you didn't directly purchase the shares. Instead, your cost basis is determined by the fair market value (FMV) of the stock on the vesting date.

Understanding RSU Vesting

RSUs are a form of equity compensation where you receive company stock after meeting certain conditions, usually over a period of time (vesting schedule). Common vesting schedules include:

• Cliff Vesting: All shares vest at once after a specific period (e.g., four years).
• Gradual Vesting: Shares vest in installments over a period (e.g., 25% annually over four years).

The vesting date is when the RSUs become your property, triggering a taxable event.

Calculating Your RSU Cost Basis: The Key Steps

The cost basis for your RSUs is generally the fair market value (FMV) of the stock on the vesting date. Here's a breakdown of the process:

1. Identify the Vesting Date: This is the crucial date when your RSUs convert into actual shares of company stock. Your award agreement will specify this.

2. Determine the Fair Market Value (FMV): On the vesting date, find the closing price of the company's stock. This is usually the official closing price listed on major stock exchanges (like NASDAQ or NYSE). If your company is privately held, determining the FMV can be more complex and might require professional valuation.

3. Calculate the Cost Basis for Each Vesting Period: Multiply the FMV on the vesting date by the number of shares that vested on that date. This is your cost basis for those specific shares. Remember that if you have a gradual vesting schedule, you will repeat this process for each vesting date.

Example:

Let's say you received 1,000 RSUs with a four-year vesting schedule (25% annually). The FMV on each vesting date is as follows:

• Year 1: FMV = $50 per share; 250 shares vest. Cost basis = 250 shares * $50/share = $12,500
• Year 2: FMV = $60 per share; 250 shares vest. Cost basis = 250 shares * $60/share = $15,000
• Year 3: FMV = $70 per share; 250 shares vest. Cost basis = 250 shares * $70/share = $17,500
• Year 4: FMV = $80 per share; 250 shares vest. Cost basis = 250 shares * $80/share = $20,000

Important Considerations:

• Taxes: The FMV on the vesting date is considered ordinary income and is taxable in the year the shares vest. You'll need to pay income tax, and potentially Social Security and Medicare taxes, on this amount.
• Withholding: Your employer will likely withhold taxes from your paycheck to cover this income.
• Alternative Minimum Tax (AMT): In some cases, RSUs can impact your AMT liability.
• Selling Shares: When you sell your shares, you'll calculate capital gains or losses based on the difference between the selling price and your cost basis (established on the vesting date).

Seeking Professional Advice:

This guide provides a general overview. The specifics of calculating your RSU cost basis can be complex, particularly in situations involving stock options, complex vesting schedules, or private company stock. It's advisable to consult with a qualified tax advisor or financial professional for personalized guidance. They can help you navigate the complexities and ensure you comply with all relevant tax regulations.