How do I make a Long-term gain (> 1 year) to be treated as ordinary income (due to disqualified disposition)?

[korndog1984]

I have a client who sold Restricted Stock Units before the holding period of 2 years from the date of grant had passed.  The sale is reported to the IRS as Long-term since it was greater than one year.  The broker statement says "Your reported sales transactions includ a shale of shares aquired through an equity compensation plan that are "disqualified dispositions" for US federal income tax purposes, which may give rise to ordinary income instead of captial gain or loss." 

I completed the Capital Gain/Loss Transaction worksheet (parts I-III) and the Employer Stock Transaction worksheet (parts II & VI) but it still shows up as a Long-term gain.  Is there a way to force it to be treated as ordinary income?

[itonewbie · Accepted solution]

You are missing the point.  RSU is not a statutory plan, which means there is no preferential tax treatment and there is no such thing as disqualifying disposition of RSU.

Income for RSU should have been fully accounted for on the W-2 and established a cost basis.  You need to refer to the grant/award statements (with reference to your client's compensation breakdown) for details of the cost basis and should report the sale as LTCG.

Even if it were a statutory option, which it is not, your understanding is not the correct tax treatment for disqualifying disposition.

[korndog1984]

Thank-you for your help.  Let me add a few more details.  The compensation was included in the taxpayer's 2017 W-2, which is the basis and Fidelity agrees with the number.  It was Fidelity's comment about the disqualifying disposition that lead me down this trail of wondering if the gain is to be treated as LTCG or ordinary income.  Thank-you for letting me know that the proper treatment is LTCG.  

[itonewbie]

Glad to be of help, @geniakornegay! What you see from Fidelity is probably a blanket statement that covers various things under the sky and say if this applies then...

[eva]

I have difficulty filling out Part VI for RSU's.

Client had 55 Amazon RSU's. He sold 25 in June 2017 and then 21 in December 2017.  He was fully taxed by "sale to cover." 

On 6/15/2017 - 25(b) I put 55 shares; in 25(g) I put 25 shares as the same number of shares sold paid for the taxes.

On 12/15/2017 - 25(b) I put 55 shares; in 25(g) I put 21 shares as again, the same number of shares sold paid for the taxes.

Are above entries correct?

Another issue is that the client no longer works for Amazon, so his 2017 W2 does not reflect these tax payments, which for sure were made.  Shall I ask for W2's showing the stock tax deductions?

Thank you for your help!

[itonewbie]

RSU is not a statutory option.  It is taxable upon vesting, which is exactly the information that was left out of your question.  What you should look for is the amount that was already reported on the W-2 as compensation in the year the RSUs were vested and delivered in stock.

There is nothing Amazon will need to report in the years subsequent to the vesting, whether or not the former employee sells or retains the stocks.

I suppose the stocks were still held through the custodian broker, which would have records of the basis and they would have reported that to the IRS on the 1099-B.  The way you report these transactions on Sch D would be no different from any other regular shares your client bought from the open markets.

[eva]

Dear itonewbie,

Thank you very much for the response. I understand the nature of the RSU's.  My question was technical, meaning, whether I filled out the RSU worksheet correctly.

I think, yes, because the results show no related tax liability since the client was fully taxed on the sold shares, which created a basis.

Thank you again,

[itonewbie]

@eva Glad to be of help.

The RSU worksheet you referred to is unique to PS.  Since I don't use PS, I wouldn't be offer any guidance for your question on input.  My focus has been on the tax technical side of things and something is not adding up still...

1. He was fully taxed by "sale to cover.": I suppose you mean your client disposed of sufficient stocks to cover the tax withholdings (and transaction costs) at the time of vesting, which is common.  This should have happened at the time the RSUs were vested and not the time when the shares were sold (of course, unless your client was subject to backup withholding for some reason).
2. [T]he client no longer works for Amazon, so his 2017 W2 does not reflect these tax payments: This statement is not consistent with either #1 or the law.  Amazon is required under §83 to report as compensation (and allowed a deduction for) FMV of the RSUs upon vesting when the shares not subject to substantial risk of forfeiture are transferred to its employees.  I have never seen a major employer failing to meet this basic requirement, as they are supported by an army of in-house and external specialists and advisors who earn their keep.  In the year the RSUs were vested (whether or not it was after the last year of employment probably as a result of good leaver provisions), the FMV would have been captured as compensation to be reported on the W-2 and that would be the only reason why some of the shares would have to be sold to cover the tax withholdings (and transaction costs).
3. [T]he results show no related tax liability since the client was fully taxed on the sold shares, which created a basis: If the shares were vested and immediately sold, it would often result in a minor loss due to transaction costs.  If your client disposed of only sufficient shares to cover the required tax withholdings (and transaction costs) at the time of vesting and sold the remaining shares at a later time, you should expect a certain amount of capital gain given how the share price has generally moved over those years.

Hope this makes sense.