How to Identify the Right Time to Sell Restricted Stock Units

In the current business landscape, companies leave no stone unturned to attract and retain top talent. One of the most common strategies to retain the company’s key resources is to offer compensation in the form of Restricted Stock Units (RSUs).

Some leading companies, including Tesla and Google, deploy this tactic to ensure that their top-performing employees do not leave them.

It is important to understand that owning RSUs differs from owning regular stocks. When companies issue RSUs, they offer a non-monetary incentive that can potentially materialize into a large reward. Simply put, when companies include restricted stock units as part of an employee’s compensation package, they promise to grant company stocks in the future.

However, the granting of these stocks depends on the vesting period. Employees can avail of them after working with their employer for a certain period or after meeting a target predetermined in the work agreement.

This article explains what RSUs are and the best time for selling them.

What are Restricted Stock Units?

Restricted Stock Units are company shares granted to employees as compensation for staying with a company for a specified time or achieving noteworthy milestones. RSUs are presented with a vesting period.

Since the RSUs’ value directly depends on the market value of the company’s shares, it motivates employees to work hard. Even so, they are only valuable when their vesting period is over.

Since RSUs are considered as an income, a portion is set aside to pay taxes. The rest of the RSUs are with the employees, which they can sell at their convenience.

Why Is It Important to Sell RSUs?

Although it is not mandatory, selling RSUs is recommended to earn extra compensation, like a bonus for performing well and proving loyalty to the company. The key difference between a bonus and an RSU is that employees receive shares instead of cash. Thus, selling these shares to convert them into cash is critical.

Determining the Right Time to Sell Restricted Stock Units

It is important to note that selling RSUs is different from selling regular stocks.

When RSUs are granted, you must determine the right time to sell them. Although it is common to sell RSUs immediately after receiving them, the decision hinges on numerous factors, including long- and short-term financial objectives.

Immediate Sale of RSUs

One should sell RSUs immediately after receiving them because RSUs are taxed after the vesting period.  This tax is calculated according to the ordinary income tax rates and is applicable even if you do not sell your RSUs.

Profit or loss from selling the RSUs will depend on how the stock performs before you sell it. When held for less than a year, you will likely make short-term capital gains on your RSUs. You make a long-term capital gain if you hold your RSUs for more than a year.

However, since you are already paying taxes when shares are vested, you do not receive any tax benefit to hold the shares.

When Should You Hold Your RSUs?

While selling RSUs immediately after they vest is recommended, there are a few scenarios where holding your stocks is a good idea. One of the main reasons to hold RSUs is when you are sure your company will fare relatively better than the overall market.

It is no secret that people purchase stocks hoping to outperform the market even though data suggests otherwise. Thus, it is very important to evaluate the pros and cons of holding your RSUs and whether your decision aligns with your financial objectives.

Final Thoughts

Most privately-held companies offer RSUs as compensation to attract and retain top talent. However, since you have to pay a tax on RSUs before you sell them, it is recommended to sell them immediately after receiving them.

If you choose to hold the shares, you should ensure that your decision is backed by concrete research and is in sync with your financial goals.

If you still have doubts regarding the best time to sell your Restricted Stock Units, get in touch with trica today. Our team of experts will answer all your queries and help you identify the best time to sell your RSUs.