Avoiding Wash Sales with Restricted Stock Units: A Tech Employee's Guide

As a tech employee who receives restricted stock units (RSUs) as part of your compensation package, you may be considering selling them at a loss in order to offset capital gains from other investments. However, it's important to understand the concept of wash sales and the impact it can have on your taxes. In this article, we will explain what wash sales are, how they can affect your taxes, and what steps you can take to avoid them.

What is a Wash Sale?

A wash sale is a type of transaction that occurs when an individual sells a security at a loss, and then repurchases the same or a substantially similar security within 30 days before or after the sale. This type of transaction is not allowed for tax purposes, as the IRS disallows the use of wash sales to claim a loss on taxes in order to prevent individuals from artificially reducing their tax liability.

A stock vest is considered a purchase for the purpose of a wash sale because when an employee receives restricted stock units (RSUs) as part of their compensation package, they are effectively purchasing the shares at the fair market value on the date of vesting.

Impact on Taxes

If you engage in a wash sale, you will not be able to claim the loss on your taxes. It's important to note that the wash sale rule applies to both the purchase and sale of securities. This means that if you sell RSUs at a loss and then purchase similar securities within the 30-day window, the loss will be disallowed. However, if you wait 31 days or more after selling the RSUs before repurchasing similar securities, the loss will be allowed for tax purposes.

It's also worth noting that the wash sale rule applies not only to the purchase of securities, but also to the acquisition of substantially similar securities through other means such as options or futures. So, If you sell RSUs at a loss and then purchase options or futures on similar securities within the 30-day window, the loss will be disallowed.

Avoiding Wash Sales

To avoid a wash sale, you should wait at least 31 days before repurchasing similar securities after selling RSUs at a loss. Additionally, it's important to note that the wash sale rule applies to each individual account you own, so you can't offset a loss in one account with a gain in another account.

Here's a more practical example of how a wash sale works:

It's important to note that in this example, the employee should have waited until after February 1st to repurchase the shares, in order to claim the loss on taxes.

Consult with a Professional

Finally, you should also consult with a tax professional or financial advisor to determine the best course of action for your specific situation. They can help you to understand the tax implications of your investment decisions and develop a strategy that helps you to minimize your tax liability while also achieving your financial goals.

What to remember

In conclusion, a wash sale occurs when an individual sells a security at a loss and then repurchases the same or a substantially similar security within 30 days before or after the sale. As a tech employee who receives RSUs, it's important to be aware of the wash sale rule and the impact it can have on your taxes. To avoid a wash sale, you should wait at least 31 days before repurchasing similar securities after selling RSUs at a loss and consult a tax professional or financial advisor for guidance on your specific situation.