As a Google employee, you’ve been granted Restricted Stock Units, commonly referred to at the company as Google Stock Units (or GSUs for short). This is an excellent benefit that adds to your overall compensation. But in a down market, there are some tax traps to be aware of, mainly the IRS’s wash sale rules. Wash sales aren’t typically a major consideration for taxpayers. However, Google’s monthly vesting of GSUs creates a unique tax filing obstacle. If you want to know how to correctly handle this on your tax return, keep reading.
Wash Sale Rules
Stock wash sale rules are designed to prevent taxpayers from artificially generating tax losses by selling and repurchasing the same securities within a short period of time.
These rules can be complex and confusing for individual investors who may be unaware that they are triggering wash sales. In this post, we will examine the following:
- Details of the wash sale rules.
- How the rules apply to different types of securities.
- How you can avoid triggering wash sales on your investment activities.
First, let’s define what is meant by a “wash sale.”
The IRS defines a wash sale as a transaction in which an investor sells a security at a loss and then repurchases the same security, or a “substantially identical” security, within 30 days before or after the sale. If a wash sale is triggered, the investor is not allowed to claim the loss on their tax return for the year in which the sale occurred. Instead, the loss is added to the cost basis of the repurchased security. This means that the loss will be deferred until the repurchased security is eventually sold at a gain.
For GSUs, the important consideration is the 30 day period. Since Google schedules GSU vesting on a monthly basis, it is very likely that you could have sold shares from the prior month within 30 days of receiving shares for the following month.
If the Google stock goes up, you’ve got a gain and the wash sale rule won’t apply.
But in a down market, your sale could generate a suspended tax loss.
Reporting Wash Sales
So why all the concern about wash sales?
First of all, it’s important to note that brokerage statements don’t always provide the correct gain & loss information on your year end reporting document. If you simply take the numbers and transfer them to your tax software, you could be making tax filing errors.
Brokerage firms will generally apply the wash sale rules for you. But when stock options are involved, it is common to see cost basis reporting errors since the reporting systems aren’t sophisticated enough to apply the wash sale rules across multiple classes of investments (in this case stock options & individual shares of stock).
If you trigger a wash sale, it’s important to report the transaction correctly to avoid potential penalties from the IRS. Here’s how to report a wash sale on your tax return:
- Calculate the loss that was deferred due to the wash sale. To do this, subtract the cost basis of the repurchased security from the sales price of the original security.
- Add the deferred loss to the cost basis of the repurchased security. This will increase the cost basis of the repurchased security, which means that the deferred loss will be recognized when the repurchased security is eventually sold at a gain.
- Report the wash sale on Form 8949, Sales and Other Dispositions of Capital Assets. On this form, taxpayers should enter the date of the original sale, the date of the repurchase, and the deferred loss.
- Carry the deferred loss forward to the next tax year. The deferred loss should be reported on the tax return for the year in which the repurchased security is sold at a gain.
Let’s look at an example!
Assume that on March 15th you sell 100 shares of Alphabet stock at a loss of $500 (original purchase price of $1,250 – original cost of $750). Then on March 25th, you receive your monthly vesting of 100 shares of Alphabet stock. You have triggered a wash sale because the repurchase (GSU vesting) occurred within 30 days of the sale.
To calculate the deferred loss, you would add the deferred loss of the original shares to the cost basis of the repurchased shares. Assume that the cost basis of the repurchased shares is $800. The new cost basis on the repurchased shares would be $800 + $500 = $1,300.
On your tax return, you would report the wash sale on Form 8949, Sales and Other Dispositions of Capital Assets. The deferred loss of $500 would be carried forward and reported on the tax return for the year in which the repurchased shares are sold at a gain.
Avoiding the Wash Sale Rules
One way to avoid wash sales is to wait at least 31 days before repurchasing a security that has been sold at a loss. This will ensure that the transaction does not fall within the wash sale period. However, this is pretty difficult to do when you receive new shares every 30 days.
Another way to avoid this would be to only sell shares at a gain. Easier said than done in a down market.
In order to divest of shares, you might find there is no way to avoid wash sales. In this case, you‘ll need to be resigned to tracking the changes until all your replacement shares have been sold.
Consider setting up a Google Sheet to track the differences in cost basis from one period to the next. Keep a copy with your tax records in case the IRS has questions about the discrepancy between year end tax reporting documents and your return.
Tracking cost basis and reporting gains and losses correctly can be a “taxing” exercise. Be sure to keep good records so you don’t double pay taxes on stock option sales. If you have questions, please reach out to our team of stock option tax experts.