By Mike Gibbons, RICP®
With everything going on with the coronavirus and economy, you may be facing some challenges. Perhaps you’ve had a reduction in pay or hours, or you or your spouse have been furloughed. Maybe your financial situation is strong but you have family members who aren’t so lucky coming to you for help.
No matter the situation, when you are in need of cash, you may find yourself turning to company stock. Cashing out your restricted stock units is a good way to access quick cash without going into debt. However, it isn’t as simple as hitting the “sell” button on your computer screen. There are a number of tax and other issues that you should be aware of when you decide to sell your company stock.
Capital Gains & Capital Losses
When you sell shares of stock that are not in a retirement account, you generate a capital gain or a capital loss. If the share has appreciated in value since you bought it or paid taxes on the grant, then you have a capital gain. If it has gone down in value, then you have a capital loss. For tax purposes, capital losses can be used to offset capital gains and up to $3,000 of regular income.
If you wait at least a year to sell the stock after you purchase it in an employee stock purchase plan (ESPP), exercise stock options, or your restricted stock units (RSUs) vest, the gains are considered long term and taxed at lower rates. If you don’t wait a full year, then the gains will be taxed at about the same rate as your regular income.
Choose Which Shares To Sell
You likely bought or were granted stock at more than one time. Because of this, you could have stock with both capital gains and capital losses at the same time. If that is the case, then you will want to be strategic about which stocks you sell so that you can offset your gains with your losses. If you only have gains, then you still may want to be specific about which shares of stock to sell in order to limit the taxes that you will owe.
Unless otherwise specified, when you sell shares, the ones that you have owned the longest will be sold first. That isn’t a requirement, however, so you can request that certain shares are sold even if you have owned others longer. When trying to offset capital gains and losses, it is important to make sure your custodian knows which shares you want to be sold.
Time It To Avoid Wash Sales
Because selling at a loss can reduce your tax burden, the IRS created the wash sale rule to keep people from taking advantage of the opportunity and cheating the system. When you claim a loss on a sale of stock, you are not allowed to purchase the same stock within 30 days, either before or after, or you won’t be able to benefit from the loss in the same way.
Having restricted stock vest within 30 days before or after the sale, exercising a stock option, an ESPP purchase, and a company stock dividend reinvestment all count as a purchase for the wash sale rules. If you are going to sell company stock at a loss, make sure that it is more than 30 days before or after any of those events.
Follow Post-Termination Stock Option Rules
If you suffer the misfortune of losing your job and have vested stock options outstanding, you should go back and read your grant agreement and the rules for your stock plan. Most often, vesting immediately stops upon termination and you have only 90 days or less in which to exercise and options that are already vested. If you fail to exercise your options within the specified time limit, you will forfeit their value.
How We Can Help
As you can see, there is a lot more to cashing out company stock than just hitting “sell.” The way you go about the sale and your timing can have major tax implications. As such, it is always wise to consult with an experienced financial advisor prior to pulling the trigger. If you want help maximizing your stock options and don’t already have a trusted advisor, I can help. Call 224-419-5550 or email me at Mike@gibbonsfinancialgroup.com to schedule a complimentary consultation.
About Mike
Michael J. Gibbons is founder and president of Gibbons Financial Group, an independent advisory firm providing custom-tailored financial planning and investment management services to pharmaceutical and healthcare professionals and their families. Mike has over 25 years of experience and spends a significant portion of his day working with pre-retirees and retirees, focusing on asset management, Social Security and pension planning, as well as retirement income preparation. Under the RIA, Mike helps manage approximately $150 million in assets under management and works with clients that meet a minimum investment criterion.
Mike has degrees in both business and psychology from Lake Forest College and currently holds his Retirement Income Certified Professional (RICP®) designation from the American College. Mike was named a Five Star Wealth Manager for 2015-2019* Mike is heavily involved in his community, having served on the Village of Gurnee Police Pension Board as a Community Volunteer and the St. Patrick’s Parish Financial Board. When he’s not working or volunteering, Mike loves playing golf and spending his time with his wife and children. To learn more about Mike and how he can help you, connect with him on LinkedIn, visit his website, and register for his free webinar, Retiring Early From Pharma, created specifically for professionals retiring from the pharmaceutical, biotechnology, and healthcare industries.
*As reported by Financial Planning Magazine, June 1996-2015, based on total revenue. Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management, among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2015 Five Star Wealth Managers.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.