What Is the Taxable Event for RSUs?

A concept I am asked about with some frequency is the taxable event for RSUs. In fact, I’ve been asked about it twice in the last month, so it seems like a good topic for a blog entry.

But first a reminder: if you haven’t already, don’t forget to participate in my Hot or Not? poll in last week’s blog. I could really use your input.

Now back to my regularly scheduled blog entry.

What Is the Taxable Event for RSUs?

RSUs are taxed when the award recipient has constructively received the shares or compensation paid under the award. Constructive receipt is not a bright-line concept, it’s a facts-and-circumstances determination.

This determination is complicated by the fact that employees rarely take physical possession of the shares underlying their award on the award’s scheduled vest/payout date. Once an RSU vests or pays out, it usually takes anywhere from a day to a week or more before the shares show up in the award holder’s brokerage account. The company must determine whether the taxable event is A) the vesting/payout date or B) the date the shares show up in the employee’s brokerage account.

What Happens on the Taxable Event?

The taxable event serves two important purposes:

1. It is the date used to determine the value of the underlying stock for tax purposes.
2. It starts the clock running for depositing the tax withholding with the IRS.

Sometimes companies want to bifurcate these two events (i.e., they want to use the vest date to determine the value of the stock but use the date the shares are deposited in the employee’s brokerage account to start the clock running for purposes of depositing taxes with the IRS), but this isn’t permissible. The same date must be used for both purposes.

What Do Most Companies Do?

When RSUs are paid out upon vesting, most companies consider constructive receipt to occur upon vesting and treat the few days it takes to issue the shares as merely an administrative matter, rather than a delay in the employee's constructive receipt of the underlying shares.

It could be reasonable to come to a different conclusion, however, depending on the specific facts and circumstances. Of course, one problem with treating the date the shares are deposited in the employee’s brokerage account as the taxable event is that this puts a lot of pressure on stock plan administration to do the tax calculations very quickly. Essentially everything has to happen on that one day.

What Facts and Circumstances?

Physical possession of the shares is not necessary for constructive receipt to have occurred. Some factors that should be considered when determining when constructive receipt occurs are:

• How much time elapses between the vest date and the date the shares are issued? The more time that elapses, the more likely it is that the taxable event will move to the issuance date.
• When are the underlying shares are treated as issued and outstanding for balance sheet purposes? This is the date ownership of the shares is considered to transfer to the employee for financial statement purposes. It isn’t the only indicator of constructive receipt, but it is important.
• When do voting rights on the underlying shares accrue to the employee? If the employee can vote the shares, he/she arguably has realized a benefit and thus has constructively received the stock.
• When do dividend rights on the underlying shares accrue to the employee? If the employee can receive dividends (not dividend equivalents) on the shares, this points to constructive receipt having occurred.
• When can the employee can first sell the underlying shares? Some brokers will allow employees to sell the shares before they are deposited to the employee's brokerage account. If the employee can sell the shares, that is a clear indication that constructive receipt has occurred.
• Can the employee ask for the underlying shares to be issued sooner? If the company would accommodate a request for the shares to be issued, this also points to constructive receipt having occurred.
• Which day have you treated as the taxable event for RSUs in the past? It is important to determine the taxable event in a consistent manner.

What About RSUs that Are Subject to Deferred Payout?

Most companies treat the scheduled payout date as the taxable event, even though it will take at least a day, maybe more, to get the shares into the employee’s brokerage account. The same considerations that I discuss above also apply in this context.