Do You Have RSUs that are Underwater and Worried about What to Do?
The S&P 500 is down over 17% so far in 2022, and the technology heavy NASDAQ is down even more. Some people shared their pain. It’s gut-wrenching, can’t-sleep-at-night agony. “Why didn’t I sell more of my vested RSU position while I had the chance?” “I lost so much money, what should I do now?” I had one friend tell me, “I was sitting on half a million dollars of vested RSUs, and now they are worth $100k.”
On top of this, some stocks have suffered more than others. To mention a few, Zoom is down 81% from its peak, Zillow has declined 79%, and Roku is off 78%. They are all wonderful companies with hard working, talented employees developing great products and services, but their stocks have fallen out of fashion.
Moreover, looking at stock price graphs going the wrong way, reading the headlines about the looming economic headwinds, and beating yourself up won’t improve your situation or your restricted stock units.
What Can You Do?
You are probably asking yourself “What can I do?”. To start with, the anchoring effect is more than likely taking over your thought process. You are probably focused on the RSU’s grant price, the stock’s all time high, or perhaps another share price. Then, once the shares get to this price, you promise yourself that you will sell. What if the stock never reaches that price? Perhaps the stock continues to decline? What if the stock does reach that price, and you don’t sell because you think it will only go higher? It is emotionally hard to sell below your anchor price. You will always benefit from diversification, even if the stock price is significantly below your anchor price.
First of all, if you decide to hold your vested RSUs, it will most likely continue to be a stressful, up and down experience as you see the value of your shares fluctuate.
On the other hand, if you sell your vested RSUs, and if reinvesting the RSU proceeds is right for you, a wise choice would be to invest in a broadly diversified portfolio. It is frightening because the markets are down, but a diversified portfolio will provide you comfort and safety while still making progress towards your financial objectives.
All Is Not Lost
If you have a loss after selling your vested RSUs, this can potentially be an asset when you report your taxes. The specifics depend on your situation, but the basics are as follows. First and foremost, on your income tax return there is a section for sales of capital assets. Second, sales of stock owned for less than one year are sales of short term capital assets and sales of stock owned for more than one year are sales of long term capital assets. Finally, the tally of the short term gains or losses are added to the total long term gains or losses to arrive at a total capital gain or loss.
Restricted Share Unit Examples
Here are several examples to illustrate the concept. All of the examples will use the sale of vested RSUs as a long term loss of $50,000.
1.) RSU Example 1
Short term gains: $20,000
Short term losses: $0
Net short term gain/(loss): $20,000
Long term gains: $25,000
Long term losses: ($50,000)
Net long term gain/(loss): ($25,000)
Net capital gain/(loss): ($5,000)
In this example, $3,000 of the loss will reduce taxable income in the current year. The remaining $2,000 of losses is carried forward and used in future years.
2.) RSU Example 2
Short term gains: $10,000
Short term losses: ($5,000)
Net short term gain/(loss): $5,000
Long term gains: $10,000
Long term losses: ($50,000)
Net long term gain/(loss): ($40,000)
Net capital gain/(loss): ($35,000)
Three thousand dollars is the annual limit that you can use from capital losses to reduce taxable income. The additional $32,000 of losses is carried forward to future years to offset capital gains. The carryforward is an asset because you can offset $32,000 of capital gains in the future.
3.) RSU Example 3
Short term gains: $15,000
Short term losses: ($2,000)
Net short term gain/(loss): $13,000
Long term gains: $40,000
Long term losses: ($50,000)
Net long term gain/(loss): ($10,000)
Net capital gain/(loss): $3,000
Here, the entire $50,000 RSU loss offsets the other capital gains. In fact, the capital gains were so robust that there is a capital gains tax on the $3,000 gain.
RSU Lessons Learned For Going Forward
The best way to ensure that you make the best decision for your RSUs is to pre-commit to a strategy that best suits you. What strategy is that? That depends on what you will regret more, selling and watching the stock price soar or holding on and seeing dreams destroyed as the stock price collapses. With this plan, you are locked into the strategy that will minimize your regret.
If you have more questions, feel free to reach out. I will be candid regarding any RSU questions. You can set up a free consultation.