Why is RSU tax basis based on remaining shares after shares are witheld?
I'm trying to un-confuse myself about something I seem to have wrong based on my reading (This site, btw, seems to be a good resource.)
If I vest 100 shares and the price was that day, I will only receive, say, 75 shares because 25 were withheld to pay taxes due at the time of vesting (assume net issuance model, not sell to cover, etc.)
Now, what is the cost basis of those remaining 75 shares?
Is it *100 or is it *75?
Everything I read seems to say the latter, not the former.
My logic is that I was paid 00 and withheld on 00. That's what the IRS was told (via my w2) how much I was compensated. I paid taxes via the share witholding on that 0. Why isn't my basis 00?
There's an accounting principle I'm missing here... what is it?
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Here is how it should look:
100 shares of restricted stock (RSU) vest.
25 shares sold to pay for taxes.
W2 (and probably paycheck) shows your income going up by 100 shares worth and your taxes withheld going up by 25 shares worth.
Now you own 75 shares with after-tax money.
If you stop here, there would be no stock sale and no tax issues. You'd have just earned W2 income and withheld taxes through your W2 job.
Now, when you sell those 75 shares whether it is the same day or years later, the basis for those 75 shares is adjusted by the amount that went in to your W2. So if they were bought for , your adjusted basis would be 75*.
You only got 75 shares, so your basis is the fair market value of the stock as of the vesting date times the number of shares you got: *75.
Functionally, it's the same thing as if your employer did this:
Paid you ,000 cash
Withheld 0 of that cash for taxes, and recorded that withholding on your W-2
Immediately forced you to buy company stock with the remaining ,500
As such, the basis in that stock is ,500 (*75). The other 25 shares aren't yours and weren't ever yours, so they aren't part of your basis (for net issuance; if they were sell to cover, then the end result would be pretty similar, but there'd be another transaction involved, but we won't go there).
To put it another way, suppose your employer paid you a 00 bonus, leaving you with a 00 check after tax withholding. Being a prudent person and not wishing to blow your bonus on luxury goods, you invest that 00 in a well-researched investment. You wouldn't doubt that your cost basis in that investment at 00.
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