What I wish I knew about ESPP and RSUs sooner

Original Article ↗ Hacker News Discussion ↗

Donating RSUs/ESPP Stock and Taxes

  • Donating vested shares to a Donor Advised Fund or directly to a charity can avoid capital gains on post‑tax appreciation and provide a deduction (if itemizing), but:
    • You generally cannot avoid ordinary income tax on RSUs at vest.
    • You cannot transfer unvested RSUs; taxes at vest are withheld via sell‑to‑cover.
    • Deductions partially offset, but do not fully “refund,” taxes already paid.

State Taxation of RSUs

  • RSUs are typically taxed where you work when they vest.
  • California and New York pro‑rate income from grants across residency periods and may claim tax long after moving away.
  • Some states provide credits for taxes paid to another state, but interactions can be complex; several commenters recommend professional advice.
  • There is disagreement over how “fair” or “normal” CA/NY practices are, but multiple people confirm the pro‑ration behavior.

ESPP Structure and Value

  • Many ESPPs offer a 15% discount with a lookback to the lower of start/end price, creating a near‑certain gain if sold immediately; others offer smaller discounts or none, reducing attractiveness.
  • Risk mainly comes from blackout windows and short delay between purchase and sale; “black swan” drops are possible.
  • Effective annualized returns can be high because the discount applies even to recently contributed funds, but plans differ widely.

Tax Brackets and Timing

  • Several comments address misconceptions about being “pushed into a higher tax bracket”: only income above the threshold is taxed at the higher rate.
  • Timing income (e.g., deferring sales to another year) can matter for marginal rates, long‑term capital gains brackets, AMT, and special state rules.
  • Some note special New York rules (tax‑benefit recapture) affecting very high incomes.

RSU/ESPP Tax Gotchas

  • RSUs: income at vest; selling immediately usually yields no capital gain.
  • “Sell to cover” can still leave under‑withholding because supplemental withholding rates may be below your true marginal rate.
  • ESPP and RSU sales often arrive on 1099s with zero or unadjusted cost basis; you must manually use the adjusted basis (often on a supplemental statement) to avoid double taxation.
  • Wash sale rules can be triggered by RSU vesting counting as a “purchase.”

Strategy and Risk

  • Strong recurring theme: default to selling RSUs and ESPP shares as soon as allowed and diversify, because salary and job risk already depend on the employer.
  • Some share regret from both selling too early (missing upside) and holding too long (large losses), highlighting psychological bias and unpredictability.

Other Topics

  • Clarification that 83(b) elections do not apply to RSUs (but to RSAs/options).
  • Some discussion of negotiating cash instead of RSUs, usually uncommon at large firms but reported at certain companies.
  • Mega backdoor Roth and plan design disparities noted as important but employer‑dependent.