Selling RSU At A Loss: Avoiding Wash Sales

By: AJ Ayers, CFP®

Summary:

When selling RSUs at a loss, it's crucial to consider the IRS's wash sale rule, which prevents tax deductions if the same security is repurchased within 30 days, and understand the tax implications, as RSUs are taxed as income upon vesting with subsequent sales affecting capital gains or losses.

Seeing your RSU shares lose value can be excruciating. You waited months or even years for those stocks to vest, only to watch their price plummet shortly after. According to recent statistics, the chance of selling RSUs at a loss if you hold the shares past vesting is 27%. For those unlucky employees, the average loss amounts to a staggering -15% share price drop.

Before you panic and sell all your underwater shares immediately, take a deep breath. You can minimize losses and even come out ahead with the right strategies. 

The Basics of Wash Sale

When it comes to selling RSUs at a loss, understanding the wash sale rule is essential.

A wash sale occurs when an investor sells a security at a loss and then repurchases the same security within 30 days before or after the sale.

The IRS implemented the wash sale rule to prevent taxpayers from claiming artificial losses on their taxes. It's important for us to use our trusted technical expertise to inform our readers about the implications of violating the wash sale rule.

As the rule states, if you sell an asset like an RSU at a loss and repurchase it within a 30-day window, the wash sale rule applies.

In this scenario, you can't claim the loss on your taxes, and the amount of the disallowed loss is added to the cost basis of the new shares.

For example, say you sell RSUs for $5,000 and then buy them back within 30 days for $4,000. The $1,000 loss is not deductible on your taxes due to the wash sale rule.

Instead, the cost basis of the repurchased RSUs is adjusted by the disallowed loss, making it $5,000 instead of $4,000. Understanding this rule is crucial if you're considering making use of wash sales.

Keep in mind that the wash sale rule is not limited to stocks – it also applies to options, warrants, and other securities.

Therefore, always be mindful of the 30-day window when selling and repurchasing assets in the pursuit of financial optimization and wellness.

Selling RSUs and Taxes

When it comes to selling RSUs at a loss, it's essential to understand how taxes come into play. Generally, RSUs (restricted stock units) are considered income once they vest and are taxable at ordinary income rates.

That said, any gains or losses experienced after vesting can be considered capital gains or losses.

Let's dive into the details of how to handle vested RSUs when you decide to sell them.

The first step involves calculating your cost basis, which is generally the fair market value of the RSUs on the vest date. This cost basis will be used to determine whether you have a capital gain or a capital loss when you sell the RSUs.

In a scenario where the value of the RSUs has decreased, selling them could result in a capital loss. This loss can be utilized for tax loss harvesting, which may help reduce your overall tax bill.

Typically, capital losses can be used to offset capital gains or up to $3,000 of ordinary income in a tax year.

However, it's important to be aware of the wash sale rule when selling RSUs. A wash sale occurs when you sell an asset at a loss and buy the same or a substantially similar asset within 30 days before or after the sale.

If this happens, the loss will be disallowed, and you won't be able to claim it on your tax return.

While it might be tempting to sell your RSUs right away if you think the value will decrease, it's always wise to consult with a financial advisor or tax professional before making any decisions.

A proactive approach to financial planning could involve considering different forms of equity compensation, such as an ESPP (employee stock purchase plan).

These plans can provide additional flexibility and tax benefits compared to RSUs.

But, as always, it's crucial to understand the specific tax rules and regulations that apply to your situation.

Avoiding Wash Sales

To avoid a wash sale when selling RSUs at a loss, pay attention to the timing of your transactions. Ensure that you do not buy the same or substantially similar securities within the 30-day window surrounding your sale date. If you are considering selling RSUs at a loss, we would advise you to be cautious about your company's subsequent stock purchases or grants within that timeframe.

If you find yourself in a situation where a wash sale has occurred, don't panic. There are still ways to navigate this scenario. One option is to increase the holding period of the newly acquired stock, which will allow the disallowed loss to be added to the basis of the new security. This may lessen the tax impact when you eventually sell the new shares.

Other Considerations

RSUs are one of multiple forms of equity compensation, which can also include stock options or other incentives tied to company performance. A common rule of thumb for these investments is not to sell them at a loss, as this can lead to a loss of principal. However, each individual's financial situation is unique, and you may find yourself in a position where selling your company's stock at a loss becomes necessary.

If you do decide to sell, it's crucial to understand the tax implications and consult with a tax professional to ensure you're making the best decision for your financial situation. Selling stock at a loss may affect your tax brackets, and you don't want to be caught off guard by an unexpected tax bill.

Additionally, it's essential to consider your other equity compensation options. For example, if you have stock options in addition to RSUs, it may be more strategic to sell one type of equity over the other, depending on your individual tax situation and the performance of each asset.

First, it's important to identify the reasons why you might be contemplating selling your RSUs at a loss. Are you facing a cash crunch or looking to diversify your investments? Understanding your motivation can help guide your decision-making process.

Now, let's consider the potential risks. According to Nasdaq, there's a 27% chance of selling at a loss if shares are held past vesting. The average loss incurred from late selling is typically around a 15% share price drop. These statistics may sound intimidating, but remember that every situation is unique and requires a tailored approach.

One option to mitigate potential losses is to employ hedging strategies to protect against price drops after vesting. This may involve utilizing options contracts or other financial instruments (for our sophisticated investor friends) to minimize risks associated with your RSUs.

Ultimately, deciding whether to sell RSUs at a loss depends on your personal circumstances, financial goals, and risk tolerance. It's always a smart move to consult with trusted financial professionals, like the experts at BKFi, who can provide tailored advice and help you navigate complex financial matters. Remember, we're not just number crunchers; we're here to be your thinking partner and guide to achieving your financial aspirations.