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Comment by superdude12 | Hacker News Reader

How are RSUs tax advantaged?

The award is taxed at the same rate, but theoretically (in the States, at least) you can hold them for a year after they vest and only pay the much lower long term tax on the appreciation of their value. In order to easily compare apples to apples this assumes that in the alternative to getting RSU's that you would actually get compensated more income instead in proportion to the value increase of the company. An equivalent would probably be to compare a cash bonus that is directly tied to the value of the stock vs the equivalent gain in RSU. All else being equal, the RSU gain is more tax advantageous if you have held the RSU for a year or longer before liquidating the position.

That is not a tax advantage. It is simply paying long term capital gains tax rate on long term capital gains.

Companies are not paying with RSUs because of a tax advantage, they are paying because it is cheaper than paying with cash.

While it's unclear whether grandparent was referring to tax advantages for the company vs. the individual, I'm not sure I understand your comment about lack of tax advantage in the context of individual awards.

Scenario A: Company X gives me a sign-on bonus of $10,000 and an agreement to bonus me $100 * y%, where y is the increase in value of the company.

Scenario B: Company X awards me $10,000 of RSU that vests after 1 year.

Let's say I'm in the highest bracket, $523,601 or more in income. The tax rate for that bracket for 2021 is 37%.

After 1 year, the stock price goes up 100%.

In Scenario A, I have vested RSU's worth $20,000. If I sell $10,000 of that (the gains only), I pay short term capital gains equivalent to my tax bracket, or $3700. If I hold that stock for 1 year after vesting and the stock price stays exact same for the next year, I pay the long term rate of the highest bracket which is currently 20%, or $2,000.

In Scenario B, I get a bonus of $10,000 just the same, but there is no situation where I'm not stuck with paying $3,700 on that $10,000 gain. In Scenario A, I can save almost 50% of the tax bill by holding it for a year.

This isn't how things work - you pay income taxes on RSUs when they vest, not when you sell, and their cost basis is the price at the time of vesting. So it's entirely irrelevant from a tax perspective whether they come in cash or stock. If you want cash, you can sell the stock and if you want stock, you can buy - the tax consequences are exactly the same.

RSUs are cash equivalent from tax purposes. They are taxed at market rate at vest time. If you sell at that moment and buy other stock it has the exact same LTCG treatment. It’s also the same as if you are compensated in all cash and go buy stock with that.

It’s like cash if you got more when the share price is higher.

It can also be a cash flow problem if you have to cover quarterly estimated tax in between trading windows. My day job sells and withholds 22% of my vesting RSUs, because that’s the statutory rate for supplemental wages, but I always owe about 10% more.

There is no tax advantage for the employer or the employee. Your scenario A is incorrect because you pay income tax at time of vesting, as the other comments pointed out.

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