[quote=SK in CV][quote=desmond]flu,
saw this on a fb board, is it correct?
“All FB employees that had vested RSUs will have to pay taxes on a $38 dollar gain based on the IPO price. They will be taxed at ordinary income levels, which means 45% (state and federal)
Stock price below $19 means that they have to sell ALL their shares to pay the taxes. That is mandatory.
On November 2012, when lockout is removed, you will have employees owing more in taxes than their shares are worth. FB will have to compensate them in some way. This will get very ugly”[/quote]
It’s unlikely to be accurate. RSU’s are typically not taxable to employees until fully vested. As a practical matter, vesting would require the release of the rights to sell or control the stock, which would be the november date. So they’ll be taxable to the employees at the FMV as of the Nov. date. (this is NOT the same as stock options, which may have a value at date of grant.)[/quote]
The forum is incorrect in determining “vest date” and how much is vested…
a) People typically don’t vest fully 100% at one time. They typically vest anywhere between 20-40% of there awards every year…
b) Vest date does not necessarily equate IPO date.
Also, in most cases, the taxes owed on RSU’s have already been paid most likely by employees…
The way RSU’s taxes work is follows.
1. RSU’s are stock shares given to employees. They aren’t options..They’re real shares..
2. The day you vest, you get taxed at ordinary income @ FMV * number of shares vested.
3. The day you sell those shares, you take a capital gain/loss between the FMV the day you sell and the FMV the day you vested.
So let’s use a contrived example of what would cause people get into a mess.
a) You have 100 RSU shares of FB granted to you
b) You vest 1 year later, and the FMV of is $30 that day.
c) You sell 30 days later after that, and the FMV is $20 that day (because you were an idiot and thought the thing would keep going up, while everyone decided to dump)…
*You would owe ordinary income of $30x 100 shares= or $3000.
*Later, when you sell the shares at $20…You would have a capital gain of $20-$30 x100 = -$1000. Or a capital loss of $1000.
Net effect is you would still be ahead $2000.
HOWEVER, The bad scenario is if if you have lots of shares vested.You would have a large ordinary income tax bill, BUT you would be limited to $3000 for capital loss and have to carry over the rest next year(s) .
For example example above, consider if you had 1000 shares….
*You would owe ordinary income of $30000 ($30 x1000shrs)
*Your capital loss would also be $10000, BUT IRS only allows you to recognize $3000 capital loss..You would be forced to carry over $7000 to next year.
So, you would be taxed really heavily this year ($30000-3000=$27000 taxed at income), and carry over $7000 in losses
That’s how people sort of get screwed IF they don’t sell the same day the vest and the stock falls after the day they vest. BUT it’s a gamble, because the stock could go up more after the day you vest, and then you would come out ahead. So it depends.
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The one thing about the message board post that is incorrect though is the person(s) mentioned vest date = IPO date..That isn’t the case necessarily.
RSU’s are granted usually the day you join the company, and the vest date is typically X years (typically 1 year for 20-40%) from the date you are granted..IPO date is irrelevant.
For example, if I join in January 5 2012…Typically my RSU’s 25-30% would vest in January 5 2013…The oridinary income tax would be calculated based on the FMV on January 5 2013, not the IPO price….
So unless you happened to join FB earlier where your RSU vest exactly the day of the IPO, you won’t be seeing a $38/share FMV)…
Also, for RSU’s typically the taxes are already paid for…Most companies automatically withhold the ordinary income the day you vest by selling enough shares to cover automatically the day you vest. For example, if you were due 1000 shares, most companies RSU system would automatically sell shares (maybe 100-200 shares) to cover the ordinary income automatically. (It’s called Net Issuance). IF you don’t want that to happen, the company typically requires you to pay the tax upfront….So while you do end up paying taxes on it, you don’t get a surprise tax bill at the end of the year.
The message board poster on Yahoo doesn’t know how RSU’s work, so this instead is not an issue to cause a panic sell… FB having crappy numbers, well that’s a different story.
