Warning Issued on RSU 'Double Tax' Trap
A new warning for tech employees highlights a common tax error that can lead to being double-taxed on RSUs and ESPP shares. The issue stems from brokerages failing to correctly record the cost basis (the stock's value at vesting). This can result in paying capital gains tax on income that was already taxed, making it crucial for employees to verify their tax slips and keep vesting statements.
The "double tax" error arises because the value of your vested RSUs is already included as income on your W-2 and taxed as such. When you later sell those shares, some brokerages incorrectly report a cost basis of $0 on Form 1099-B, making it appear as if the entire sale price is a capital gain. This reporting mistake is common because vested RSUs are often classified as "non-covered securities," meaning brokers are not required by the IRS to report the cost basis. This administrative gap shifts the responsibility to the employee to ensure the cost basis—the stock's market value at vesting—is accurately reported. To correct this, you must manually adjust the cost basis on IRS Form 8949. By entering the correct value from your vesting statements and W-2, you ensure you're only paying capital gains tax on the appreciation since the vesting date, not on the value you already paid income tax on. In Canada, RSUs are also taxed as employment income upon vesting, with the value added to your T4 slip. When you sell, the difference between the sale price and the value at vesting is a capital gain or loss. Though the brokerage forms differ, the principle of tracking your adjusted cost base to prevent double taxation remains the same. The default withholding rate for supplemental income like RSUs in the U.S. is a flat 22% for amounts up to $1 million. For high-income earners, this is often insufficient to cover the actual tax liability, leading to a surprise tax bill at the end of the year if not properly planned for. Holding RSUs for more than a year after they vest qualifies any subsequent appreciation for long-term capital gains tax rates, which are typically lower than ordinary income tax rates. However, this strategy only applies to the growth in value *after* the vesting date, not the initial value of the shares themselves.
