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- Why Lyft’s IPO Sucked for Employees
- And Why Uber’s IPO Wasn’t Any Better for Their Employees
- Your Answer
- What’s the Difference Between Realized and Unrealized Capital Losses?
- How to Deduct Your Capital Losses
- RSUs and Your Company’s IPO: Taxes and Other Considerations
- The Capital Loss Problem Most Tech Employees Run Into
- But… Can’t You Deduct Capital Losses Against Other Income?
- RSUs: Essential Facts
- And Then There’s the Disallowed Wash Sale Rules… Which Make Things Worse
- Restricted Stock Units Explained
- A Disallowed Wash Sale at Lyft: How it Would Work
- Why Lyft’s IPO Sucked for Employees
- Employee RSU taxation when the company goes public
- Why Monthly-Vesting RSU Are to Blame for Disallowed Wash Sales
- What happens to rsu no ipo
- What to Do if You’re Caught in the Disallowed Wash Sale + RSU Capital Losses Cycle
- 1) Go ahead and sell your RSU as planned
- IPO: When to Sell RSU Based on Share Price
- 2) Watch your 1099-Bs closely
- 3) Hire an excellent tax preparer
- RSU, Capital Losses, and Wash Sale
- Get the Help of an Expert Tax Preparer ASAP
IPOs can make for a wild tax year.
Especially if stock prices go DOWN after the IPO happens. 😱 (I know, I know.
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But it happens a lot.) And even more so if you’ve got RSU that keeps vesting after the IPO happens.
In 2019, Uber and Lyft were two of the worst-case scenarios for this.
Why Lyft’s IPO Sucked for Employees
Let’s take Lyft (ticker sign LYFT) for example.
In 2019, it hit IPO at $72 per share.
On August 19, 2019, the stock price was already down to $51.25 per share. Not very promising.
So, all the RSU shares released at the IPO and the RSU shares that have vested since the IPO happened now have an unrealized capital loss, which is a terrible tax position to be in. (We’ll explain more about why later.)
And Why Uber’s IPO Wasn’t Any Better for Their Employees
Uber (ticker sign UBER) hit IPO at $45 per share, and the IPO was a disappointment from day one.
Just a few days after the IPO, the stock was trading at $37.10.
In 2018, employees had opportunities to sell their shares in tender offers at a similar price.
The company hoped to be valued at $100 to $120 billion in an IPO. But shortly after Uber’s IPO, the company was only worth $67 billion.
And on August 23, 2019, the day this post was written, the stock price had plummeted even further, down to $33.42 per share.
So, like with Lyft’s employees, anyone who had RSU shares released at IPO or since the IPO happened now has an unrealized capital loss.
What’s the Difference Between Realized and Unrealized Capital Losses?
An unrealized capital loss happens when you own shares you haven’t sold yet, but that are currently worth less than your cost basis.
A realized capital loss, on the other hand, happens when you sell the shares at a loss.
(This is also when you get to report the loss for tax purposes.)
If you want to dig in a little deeper, IRS publication 550 about Investment Income and Expenses will be helpful, especially if you have a large unrealized capital loss. (Meaning your stock has stunk it up and gone down significantly since the IPO.)
How to Deduct Your Capital Losses
The (kind of) good news is that you ARE allowed to deduct capital losses from capital gains.
This will at least save you from a tax tragedy as well as an IPO tragedy.
First, you organize your gains and losses into short-term (held one year or less), and long-term (held more than a year).
RSUs and Your Company’s IPO: Taxes and Other Considerations
After that, each group is netted.
You figure out your net gain or loss of your short-term holdings, and your net gain or loss from your long-term holdings.
After that, you can net out the short term and long-term by subtracting the long-term gain/loss from the short-term gain/loss.
It’s a lot of addition and subtraction, but in theory, you’re allowed to deduct an unlimited amount of capital losses as long as you have a corresponding amount of capital gains.
Basically, if you’ve got an unrealized loss of $1 million, you can sell everything and claim $1 million of realized capital loss.
The only catch is, in order for that loss to count, you have to have $1 million in gains elsewhere in your portfolio to count that loss against.
This is the bad news. 😬
The Capital Loss Problem Most Tech Employees Run Into
The ability to report an unlimited amount of capital losses is a good thing—in theory.
But since most tech employees are young-ish (around 40 or younger), they don’t have the lifetime of investing and unrealized capital gains to offset their losses like their parents or grandparents might.
Instead, their RSU and stock options may be the only taxable investments they have, which may not be enough to offset their capital loss. (Not many people will have that $1 million in capital gains just sitting around somewhere to offset their losses from the IPO.)
This means you could be stuck with your capital losses, and all of your RSU would be taxed as ordinary income at the high IPO price.
😣 (Which means you can’t deduct them as losses.)
But… Can’t You Deduct Capital Losses Against Other Income?
Yes, but only up to $3,000 against other income like your W2 wages. (Big whoop.
RSUs: Essential Facts
If only that would be enough to make a difference!)
Any way you look at it, it’s a bad tax situation to be in.
And Then There’s the Disallowed Wash Sale Rules… Which Make Things Worse
As if what we’ve talked about so far isn’t bad enough, wash sale rules for IPO, double-trigger RSU, or unrealized capital loss will basically kick you when you’re already down.
In a wash sale, you can sell, say, 100 shares at a loss.
BUT, if at any point in the 30 days before or after you sell those shares you buy more shares of the same stock, your loss is disallowed for the amount of stock you buy.
Restricted Stock Units Explained
(Like if you bought 20 shares, you could only report the loss on 80 of the 100 shares you sold.)
Thing is… this isn’t limited to being an active buyer of the stocks. The “buying” part also counts if RSU vests as a result of you being an employee at a company.
Even IRS publication 550 says this in pretty plain language:
You are an employee of a corporation with an incentive pay plan.
Under this plan, you are given 10 shares of the corporation’s stock as a bonus award. You include the fair market value of the stock in your gross income as additional pay. You later sell these shares at a loss. If you receive another bonus award of substantially identical stock within 30 days of the sale, you cannot deduct your loss on the sale.
(Find it on page 56, with Example 2.)
A Disallowed Wash Sale at Lyft: How it Would Work
Let’s say you’re a Lyft employee.
On the IPO, you got 10,400 shares of double-trigger RSU released at $72 per share. Because RSU are taxed as ordinary income, you now owe ordinary income tax on an additional $748,800 above your other income.
($72 x 10,400)
On August 19, you decide to sell all 10,400 shares from your RSU, all at a capital loss.
Why Lyft’s IPO Sucked for Employees
The new price was $51.25, and you just wanted to get out a little bit ahead of the game.
But then, on August 20, you vested another 600 shares just because you didn’t quit your job and stayed at Lyft as an employee. Because this happened, part of the capital loss you could have reported on the sale of the 10,400 shares is now a disallowed wash sale.
The vesting of the 600 shares on August 20 triggers a wash sale that disallows the capital loss on 600 of the shares sold on August 19.
You don’t lose the capital loss that is disallowed on the 600 shares sold on August 19, which is good news.
BUT you do have to adjust your cost basis on the 600 shares vested on August 20 to account for the disallowed loss.
Your adjusted cost basis will be equal to the total value of the August 20 shares at vest plus the disallowed loss. Here’s how that math breaks down:
Your initial 10,400 shares would have vested at the cost basis of $72, which was the price of the stock when the IPO happened.
On August 19, when you sold those 10,400 shares, the price was $51.25 per stock, which gives you a $20.75 realized capital loss per share.
However, when your next set of 600 shares vested on August 20, the cost per share was $53.21.
Employee RSU taxation when the company goes public
To adjust the cost basis for the 600 disallowed shares, you then have to add that day’s cost basis ($53.21) plus the disallowed loss from your sale ($20.75 per share) to get your new cost basis per disallowed share, which amounts to $73.96.
(Yes, it’s even higher than your original cost basis, and no, it’s not fair… especially since you can’t do anything about the vesting RSU.)
Please note: The numbers above are approximate. This is complex and hard to track. You should work with a tax preparer who is an expert at RSU, capital losses, and wash sale rules.
If this all sounds complicated, don’t worry.
It is complicated.
This is why it’s so important to work with a tax preparer who’s an expert at RSU, reporting capital losses, and wash sale rules.
Why Monthly-Vesting RSU Are to Blame for Disallowed Wash Sales
By now, you probably get why monthly-vesting RSU is not a great thing, especially at companies where the stock price is going down instead of up.
If your RSU keeps vesting every month, and the stock price keeps going down, you’ll constantly be running into disallowed losses due to wash sale rules.
What happens to rsu no ipo
Even if you sell RSU the instant they vest, you’ll always have more shares vesting the next month that will disallow your last sale.
(This is why I wish every Pre-IPO company would consider quarterly vesting when they switch from stock options to RSU.
That way, the shares would vest every 90 days, which would give employees a much easier time with wash sales if their share price goes south after IPO.)
What to Do if You’re Caught in the Disallowed Wash Sale + RSU Capital Losses Cycle
If you’re in this situation of capital losses on your RSU and monthly-vesting RSU here’s what to do:
1) Go ahead and sell your RSU as planned
Don’t let the details of a disallowed wash sale interfere with your plan to sell your stocks. The wash sale just means the loss is disallowed for now and delayed until later.
This is how the “loss” comes back in your favor:
Because your disallowed loss gets added to the cost basis of the new shares (like in the Lyft example above), you’ll be able to use that disallowed loss in a future sale of the new shares that vest.
IPO: When to Sell RSU Based on Share Price
This will either increase the capital loss you can report on the new shares, or decrease the capital gain you have to report if the stock price ends up going back up.
Basically, the loss ends up having the same tax impact, but because of the wash sale rules, you have to use that loss at a later date. (And yes, it can be a TOTAL headache rolling these disallowed losses all on top of each other if you’re constantly selling shares as soon as they vest. 🤕 This is why it’s important to have a tax professional helping you out.)
2) Watch your 1099-Bs closely
A 1099-B is a form that firms like Etrade, Charles Schwab, or other equity awards portals will send you come tax time.
It reports the transaction of your shares to the IRS.
The thing is, these forms are not always correct.
You may need to adjust your cost basis and report a different gain/loss than what’s reported on the 1099-B. Keep an eye on them when they come in, and compare them with your records.
3) Hire an excellent tax preparer
With a situation like this, your next tax return is going to be an absolute mess to figure out.
RSU, Capital Losses, and Wash Sale
Nothing about it will be simple or easy.
You’ll want to hire someone who’s well-versed in RSU-related issues (including disallowed wash sales), as well as making the most of your capital losses. They’ll be able to prepare all the documentation sent to the IRS correctly, which will save you a lot of headache.
(Paperwork for situations like this that isn’t 100% correct increases your chances of getting a scary IRS notice in the mail.)
Get the Help of an Expert Tax Preparer ASAP
Thing is, the sooner you get the help of an expert tax preparer, the better.
You’ll be able to run the numbers and understand the math behind all your possible tax outcomes with your decreasing stock value and capital losses.
This way, you can figure out the best actions to take now and how to prepare your finances for the best possible outcome.
Click here or on the button below to book a call with one of our financial and tax advisors who work with tech employees dealing with RSU questions every single day.