A Simple Guide: How to Report Sell-to-Cover RSUs on Taxes

If you’ve been granted restricted stock units (RSUs) as part of your compensation, you’re probably wondering how to handle the taxes—especially if you’ve recently used, or plan to use, a sell-to-cover method to pay for taxes on those shares. We’ve got you covered with this guide to help you understand how to report sell-to-cover transactions on your tax return. And if you have questions, it can be helpful to talk to a tax professional.

Table of contents

1. What Are Restricted Stock Units (RSUs)?
2. What Does Sell-to-Cover Mean for RSUs?
3. Know the Two Key Tax Events of RSUs
4. Reporting RSUs on Your Tax Return
5. Tax Forms You Need to File for an RSU Sell-to-Cover

See our complete guide: Restricted Stock Units (RSUs): Everything You Need to Know

What Are Restricted Stock Units (RSUs)?

Restricted stock units (RSUs) are shares of your company’s stock given to you as part of your compensation. You don’t own them right away. They vest over time, which means you get them gradually, typically tied to how long you’ve worked at the company, other performance goals, or at the time of a liquidity event such as an initial public offering or acquisition.

What Does Sell-to-Cover Mean for RSUs?

When RSUs vest, they become taxable. That means you owe taxes on their value at the time of vesting. In many cases, companies offer a sell-to-cover option. This means that when your RSUs vest, your company automatically sells a portion of those shares to cover the taxes you owe. The remaining shares are yours to keep or sell.

So, how do you report this on your taxes? Let’s break it down in three steps.

Need help navigating RSUs? Talk to a tax advisor from Harness.

1. Know the Two Key Tax Events of RSUs

There are two main tax events when it comes to RSUs:

Taxable Event 1: When the RSUs vest

This is when you owe taxes, and it’s considered taxable income. The amount you’re taxed on is the value of the stock on the vesting date.

Taxable Event 2: When you sell shares

If you sell any of the shares, you may owe capital gains tax. This could be taxes owed on shares sold any time you sell in the future. Keep in mind that whether it’s taxed as short-term or long-term capital gains depends on how long you hold the shares before selling them.

2. Reporting RSUs on Your Tax Return

Here’s how to report both taxable events for RSUs:

RSU Vesting (reported as W-2 Income)

When your RSUs vest, their value is treated as ordinary income and is usually included on your W-2. You likely don’t need to take extra steps to report this on your tax return because it’s already in your income. Just confirm the amount is correct on your W-2.

For example:

• If 200 shares vested, and the stock price is $50 per share, your income from RSUs would be $10,000. This amount should show up on your W-2 from your company. When you file your taxes it will be reported on your tax return.

Sell-to-Cover Transaction (potentially reported as capital gains)

Companies may use two options for a sell-to-cover transaction:

1. Net Issuance: This is when your company does not use a broker. Instead of giving you all of your shares, they hold back a percentage of shares and give you a “net” number of shares after accounting for your tax bill. With a net issuance, you don’t have to do anything on your taxes unless you sell some of your remaining shares. This is because your company already withheld taxes for you.
2. “Forced Sale” Via a Brokerage: In this scenario, your company uses a broker to sell a percentage of your shares after vesting to cover taxes. With this type of sale, the per-share price may be slightly different from the price at vesting, and you have to report this on your taxes for this “forced” sale. If you sell some of your remaining shares, you will have to report those on your taxes separately.

If your company sells a portion of your shares through a “forced sale” to cover your taxes, this transaction will appear on your brokerage statement.

• The sale will be recorded on a 1099-B form from your brokerage. It will show the number of shares sold and for how much.
• If the cost basis for these shares (the original value) is the same as the price on the day they vested, you shouldn’t owe any extra tax on this sale since it was done to cover taxes.

Here’s how to report a sell-to-cover RSU forced sale transaction on your taxes:

1. On Form 8949, report the sale of the shares with both the sale price and the cost basis as the same value.
   • Example: If 10 shares were sold at $50 per share to cover taxes, you report a sale of $500 and a cost basis of $500. This results in zero capital gains.

Selling Remaining Vested RSU Shares

If you decide to sell any of the remaining RSU shares you kept, this is where capital gains tax comes in. The amount you’re taxed depends on how long you’ve held the shares after vesting:

• Short-term capital gains (if sold within a year) are taxed at your regular income tax rate.
• Long-term capital gains (if held for more than a year) are taxed at a lower rate.

For example:

• If you sell your remaining 90 shares a year later at $60 per share, your cost basis is the vesting price ($50 per share), and you would owe capital gains tax on the $10 difference ($60 – $50).

3. Tax Forms You Need to File for an RSU Sell-to-Cover

For an RSU sell-to-cover transaction, you’ll likely need to file the following tax forms:

• W-2: Your RSU income will already be reported here.
• Form 1099-B: This reports the sale of your shares (for both sell-to-cover and any other sales).
• Form 8949 and Schedule D: Use these forms to report any capital gains or losses from selling RSU shares.

Handling taxes on RSUs can seem tricky, but breaking it down into these steps makes it manageable. If you have any doubts, consulting a tax professional can ensure everything is reported correctly.

A Tax Advisor Can Help You Navigate RSUs

If you need help navigating tax questions around equity compensation, business ownership, self-employment, or any other unique tax situation, working with a tax advisor from Harness can help you target your goal of reducing tax liabilities. From comprehensive planning to tax preparation, our experts are here every step of the way. Get started with Harness today.

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