Throughout my 5 years at Amazon, the taxes associated with Amazon’s RSU compensation were commonly misunderstood. This post will hopefully allow you to understand the basics around each situation.
Is my RSU treated as ordinary income or capital gains income?
The cash amount of the RSU at the time of vest, is considered ordinary income, just like your base pay. For example, if you received 5 RSU’s at $2,000/share on 1/1/2020, this would be classified as $10,000 in ordinary income, taxed at ordinary income rates. Regardless of the release methods we reviewed in Part 2, all $10,000 would be ordinary income. Even if you don’t sell the shares, the price which they vest at is the price that is used to calculate your income from those shares. The vesting date determines what year the income counts towards, not the date when you sell the shares.
Continuing this example, if your base pay is $100,000/year and you receive $10,000 in RSU’s for 2020, your total ordinary income would be $110,000.
Are there capital gains implications with RSU's?
Ordinary income is different from capital gains income which can be taxed at different rates. Capital gains taxes will come into effect when you choose to sell your shares. Capital gains are considered the amount profited from an investment. In the case of RSU’s, this would be the difference between your vest price (cost basis) and the final sale price.
If you choose to sell your shares immediately on your vest date, the capital gains are usually very close to $0. There can be some difference between the vest price (price at the opening of the market) and the price which the shares actually get sold at (some time slightly after market open), but generally these prices are not that different. Even though the amount is small, there is still a capital gain/loss that will need to be reported to the IRS.
Capital gains become a serious consideration when you choose to hold onto the shares for a longer period of time. For example, if you vested 5 shares on 1/1/2020 at a share price of $2,000 ($10,000 value) and sold the shares on 7/1/2020 at $2,100 ($10,500 total value), your capital gains would be $500.
Short-Term vs Long-Term Gains for RSU's
There are two different types of capital gains, short-term and long-term gains. Short-terms gains are those realized on an investment which is held for less than 1-year. If you hold the investment for longer than one year, it is considered a long-term gain.
Short-term capital gains are taxed at your higher ordinary income tax bracket. If you’re filing single and your total income for 2020 is $110,000, your highest tax bracket is the 24% bracket, so the short-term gains would be taxed at 24%. The 2020 tax brackets can be found here.
What if I hold the RSU's for longer than 12 Months?
If you hold the RSU’s for longer than 12 months beyond your vest date, the gain in share price (Share price at time of sale – Price at vest) will be treated as a long-term capital gain.
Long term capital gains are taxed at different rates depending on your total taxable income, but almost always lower than short term gains. A detailed explanation can be found here (Investopedia) but in short:
If you’re filing single in 2020 based on total income:
0-$40,000 in total income, long term gains will be taxed at 0%
$40,000 to $441,450 in total income, long term gains will be taxed at 15%
$441,450+ total income, long term gains will be taxed at 20%