Restricted stock units have become a standard part of pay at tech companies and many other public employers. Most employees understand the basics: shares vest, the value is taxed as ordinary income, and whatever you do with the shares afterward creates capital gains or losses.
Many don’t realize that the vesting schedule itself may interfere with one of the most useful tools in personal tax planning, which is selling at a loss. The reason is the wash sale rule, and how it applies to stock compensation is less settled than many people assume.
What the wash sale rule does
Under Section 1091 of the Internal Revenue Code, you can’t deduct a loss on a stock sale if you acquire “substantially identical” stock within 30 days before or after the sale. That creates a 61-day window centered on the sale date. If you acquire the same stock anywhere in that window, the loss is disallowed.
The rule is meant to stop investors from selling a stock to claim a loss and then buying it right back, which would leave their economic position unchanged. Congress wrote it with active traders in mind. Whether it also reaches shares you receive as compensation is the question that matters for RSU holders.
Does RSU vesting count as a purchase?
No IRS ruling, regulation, or court decision addresses RSU vesting directly. When RSUs vest, you become the owner of new shares, with a cost basis equal to the fair market value you were taxed on. The open question is whether that counts as “acquiring” stock under the wash sale rule.
Most commentators, including myStockOptions.com, take the view that it does. The closest guidance is an example in the wash sale section of IRS Publication 550. In it, an employee receives company shares as a bonus, pays income tax on their value, and later sells them at a loss. If the employee receives another stock bonus within 30 days of that sale, the IRS says the loss can’t be deducted. Pub 550 is an informal publication rather than binding authority, and it doesn’t mention RSUs. Supporters also point to Revenue Rulings 56-452 and 73-329, and to Treasury Regulation 1.1091-1(f), which defines “acquired” to include contracts to acquire stock. An RSU agreement is arguably such a contract.
A minority disagree. Kaye Thomas, author of Consider Your Options, argues that shares received as compensation for services shouldn’t be treated as a purchase for wash sale purposes. Some brokers side with the majority in practice, stating in their tax-reporting materials that they treat an RSU release as an acquisition.
Until the IRS or the courts settle it, the safer course is to assume vesting counts, and the rest of this article follows that view. For restricted stock awards (as opposed to RSUs), there’s a further question of whether the grant date, rather than the vest date, is the acquisition date, particularly if you made an 83(b) election. If you’ve sold company stock at a loss within 30 days of a grant or vest, raise this with your tax advisor.
Here is how it plays out under the majority view. Consider a hypothetical employee, Priya, who received 100 shares at a March vest when the stock traded at $150. By August, the stock has fallen to $100. She sells all 100 shares to harvest a $5,000 loss. Ten days later, 50 more RSUs vest at $100.
Because 50 replacement shares arrived within 30 days, the loss on 50 of the shares she sold ($2,500) is disallowed. The other $2,500 is still deductible, since the rule applies share for share. That’s a partial wash sale.
The disallowed loss usually isn’t gone for good
In most cases, a wash sale defers the loss rather than eliminating it. The disallowed amount is added to the cost basis of the replacement shares. In Priya’s case, the $2,500 is spread over the 50 new shares, raising their basis from $100 to $150 each.
The holding period of the original shares also carries over to the replacement shares. When she eventually sells the new shares, the higher basis reduces her gain or increases her loss, so she gets the benefit back later.
Your broker generally adjusts the basis only when the sale and replacement shares are in the same account and are covered securities. Otherwise, you track it: report the disallowed loss on Form 8949 (code W), then correct the basis when you sell the replacement shares.
There is one important exception. If the replacement shares are bought in your IRA or Roth IRA, the IRS position (Revenue Ruling 2008-5) is that the loss is permanently lost. Purchases in a spouse’s IRA or in other retirement accounts may be treated similarly; ask your tax advisor.
Other acquisitions that can trigger the rule
RSU vests aren’t the only automatic acquisitions that employees overlook:
- ESPP purchases. Purchases at the end of an offering period are acquisitions of the same stock.
- Dividend reinvestment. If dividends on company stock reinvest automatically in any account, each reinvestment is a small acquisition.
- Your spouse’s trades. Purchases by a spouse count, even in separate accounts.
- Options. Acquiring call options on your company’s stock can also count as acquiring substantially identical property.
Vesting frequency changes what’s possible
How often your RSUs vest determines whether you can harvest a loss cleanly at all.
- Quarterly vesting. Vests fall roughly 90 days apart. You need to sell more than 30 days after the last vest and more than 30 days before the next, which leaves about a month each quarter (roughly days 31 through 60 after a vest).
- Monthly vesting. There’s effectively no clean window. Every day falls within 30 days of some vest, so any loss sale on company stock will at least partly be a wash sale as long as shares keep vesting.
- Annual or semiannual vesting. There’s plenty of room. Just avoid the month before and after each vest date.
If you follow the minority view that vesting isn’t an acquisition, none of these windows matter. But because that view is less widely held, most advisors plan around the vest calendar anyway.
Sell-to-cover and small wash sales
Many plans sell part of each vest to cover tax withholding, usually at close to the vest price, so the gain or loss is tiny. Revenue Ruling 56-602, which addressed shares bought in a single lot, suggests by analogy that a small loss on those shares shouldn’t be washed by the shares you keep from the same vest. No ruling addresses sell-to-cover directly.
A loss can still be washed by a different vest within 30 days, so with monthly vesting, sell-to-cover losses will often show up as wash sales. The amounts are usually small, but they explain why employees sometimes see wash sale adjustments on their 1099-B that they don’t recognize.
Your broker won’t catch everything
Brokers report wash sales on Form 1099-B (Box 1g, “wash sale loss disallowed”), but only for identical securities in the same account. They don’t see your other accounts. Reporting can be incomplete for restricted stock, which some brokers treat as a noncovered security, meaning the broker isn’t required to track or report its basis.
This matters because vested shares often land in a company-designated plan account, while employees may hold other shares of the same stock elsewhere. If you sell at a loss in one account and RSUs vest in another within the window, neither broker will flag it. You’re still responsible for reporting it, using adjustment code W on Form 8949.
A related issue: 1099-B forms for RSU shares often show the cost basis as zero or leave it blank, since the vest value was already taxed through your W-2. Filing with that number can mean paying tax twice on the same income. Check your plan administrator’s supplemental statement for the correct basis, then apply any wash sale adjustments on top of it.
Practical strategies
- Map your vest dates before selling. Put every upcoming vest, ESPP purchase date, and dividend date on a calendar. Look for a sale date with no acquisitions within 30 days on either side.
- Use specific lot identification. Choose which lots to sell. High-basis lots create a larger loss, and lots with gains avoid the wash sale question entirely, since the rule only applies to losses.
- Turn off dividend reinvestment on company stock if you plan to harvest losses.
- Coordinate with your spouse so neither of you buys the stock inside the window.
- Keep retirement accounts out of it. Avoid buying your employer’s stock in an IRA around a loss sale, since that loss can’t be recovered.
- Weigh whether the loss is worth pursuing. With monthly vesting, a wash sale is almost unavoidable. Because the loss is deferred rather than lost, the main cost is timing, which matters most if you’re offsetting large gains in the same year.
- Consider a different investment. A different company’s stock or a broad sector ETF generally isn’t “substantially identical” to your employer’s stock, though the test depends on the facts. Some investors use such a swap to keep market exposure and reduce concentration in one company. Any replacement investment carries its own risks and may not suit your situation.
The bottom line
For RSU holders, the wash sale rule may not be just a trap for aggressive traders. Under the view most experts hold, it’s a byproduct of receiving compensation in stock on a regular schedule.
The fix is mostly awareness: know your vest dates, look past the 1099-B your broker sends, and time loss sales for windows when no new shares are arriving. Because the law here is unsettled and the details vary, review significant amounts with a CPA or tax professional.
Sources
- IRS Publication 550, Investment Income and Expenses (wash sales section)
- Internal Revenue Code §1091; Treasury Regulation §1.1091-1(f)
- Revenue Rulings 56-452, 56-602, 73-329, and 2008-5
- myStockOptions.com, “What is a wash sale? How does it apply to stock comp and affect tax-return reporting?”
This article is provided for general educational purposes only and does not constitute tax, legal, or investment advice. Tax rules are complex, subject to change, and in some areas unsettled, and their application depends on your individual circumstances. Consult a qualified tax professional before acting on any information in this article.
Examples are hypothetical and for illustration only. References to specific companies or brokers are not endorsements or recommendations. All investing involves risk, including possible loss of principal.
Flores Wealth Planning is a fee-only financial planning firm registered as an investment adviser with the State of New York. Registration does not imply a certain level of skill or training. Flores Wealth Planning does not provide tax or legal advice.
