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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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I have a two fold question. I am a young professional in the

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I have a two fold question. I am a young professional in the state of MASS. I am gaining money from an ESPP stock program and a separate RSU award VESTING in the next week. I'd like to know the tax implications if I were to sell immediately. Do I get taxed on the ESPP and the RSU the same way? As I understand I get the inital Sell- To - Cover tax that the company takes my stocks from and then I have to pay capital gains when I sell. Can my broker cover the tax then or do I declare at the end of the year?

LEV :

Hi and welcome to Just Answer!
Your tax liability is determined on the annual basis - means - all taxable transactions are combined on your tax return for the year in which these transactions occurred. Thus - all taxable transaction occurred during 2013 will be reported on your 2013 tax return which will be due by Apr 15, 2014 - and your tax liability will be determined based on your total income from all sources.
ESPP stands for an employee stock purchase plan - which allows employees to purchase the corporation's stock, often at a discount and via payroll deductions. When you purchase shares with your own money - that is not taxable transaction. When your employer provide you a discount - that discount will be taxable for you as wages when vested. If you sell shares - you are taxed on the gain - equal to (selling price) MINUS (basis). The tax treatment depends on how long you keep shares. If sold within a year - the gain is taxed as wages; if sold between one and two years (Disqualifying Disposition) - the gain is taxed as ordinary income; if sold at least two years after the grant date and at least one year after the purchase date - the gain is taxed as long term capital gain - at reduced rates.

LEV :

RSU stands for "restricted stock unit" - the difference is that corporation stock is not issued at the time of the grant, but issued (granted) only when employees become vested.
When you are granted RSU - that is not a taxable transaction, but when it becomes vested - the value of the award is treated as your taxable income. The taxable income is the difference between the FMV of the grant when vested MINUS the amount you paid (if any).
If you choose to sell shares or to receive a cash value of RSU - that transaction is treated as the sale of stock - and you may have a gain or a small loss depending on circumstances.
You may review this article for additional details - https://scs.fidelity.com/webxpress/help/topics/learn_rsus.shtml#rsuvrsa

Customer:

So next week I get my ESPP shares lets say. Then if I decide to sell immediately I am responsible for the taxes in April?

Customer:

Same for RSUs?

LEV :

So next week I get my ESPP shares lets say. Then if I decide to sell immediately I am responsible for the taxes in April?
In this case - any taxable income will be treated as wages - it will be subject of income taxes and employment taxes - all withholding will be done before you receive any payment.
Your actual tax liability will be determined when you will file your tax return - and if withholding is more than your tax liability - you will claim a refund.

LEV :

Same for RSUs?
If you choose to cash immediately - there will not be any difference - withholding will be done by your employer before the payment - similar as when you receive wages - and you will receive a statement.

Customer:

So with the ESPP what about the money I put in? So say I put in 3000, after I get my shares its worth 5000, is it possible to get back less than what I put in?

Customer:

Due to TAx

Customer:

Or am I only taxed on the Difference of the balance?

LEV :

So with the ESPP what about the money I put in? So say I put in 3000, after I get my shares its worth 5000, is it possible to get back less than what I put in?
The money you pay out of pocket or the amount included into taxable income as wages - added to your basis. When shares are sold (or treated as sold) - you are taxed ONLY on your gain = (selling price) - (basis).
Yes - it is possible to have a loss. In this case the loss is deducted on your tax return.

Customer:

Ok Great, that is what I meant. So in that example I would get taxed on the 5000-3000 (2000 would be taxable)

LEV :

So in that example I would get taxed on the 5000-3000 (2000 would be taxable).
That is correct. However - the difference could be HOW that amount is taxed. If sold immediately - it will be taxed as wages - subject of income AND employment taxes. If you will hold long enough - it may be taxed at lower rates.

Customer:

Ok understood, but the initial deposit will be safe (unless there was a loss.)

LEV :

Your out of pocket money will NOT be taxed again - if that is your concern.

Customer:

Ok that is great thank you so much. Then the RSU real quickly. I get that at zero dollars, my company sells to cover which is a tax off the top. I sell it immediate I get taxed on the gain (which in this case is everything?)

LEV :

If there is NO out of pocket money involved - everything you will receive will be your taxable income.
If you sell immediately - that income is considered your compensation - and is included into your wages - so you will see it on your following pay stub.

Customer:

OK thank you so much

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