Is ChatGPT Wrong? Do RSU Vests Trigger Wash Sales Part 2

Hi,

My name is Andre. I’m a semi-retired, ex-tech worker who spends his time arguing with people on the internet about wash sales.

I write a fairly casual 2 posts per month on FaangFIRE.com. So what could possibly have happened to motivate me to write back to back weeks?

Somebody on the internet told me I was wrong.

Not just that I was wrong, but that ChatGPT agreed that I was wrong.

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Much like the three fairly senior and mostly successful FAANG software engineers above, I also enjoy the internet pastime of telling people they’re wrong.

Unfortunately for them, they underestimate the physical high I get from being incorrectly told I was wrong.

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Author’s Note: If you simply want to understand how RSU Vesting Impacts Wash Sales read the article linked below.

If you wish to join me on my petty journey to be right on the internet… please proceed.

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How it Started

As I often do, I condensed my post on How RSU Vesting Impacts Wash Sales into an Instagram Thread.

As one does, I ignored the 50+ positive comments, 100 shares, and 142 hearts and zoomed into the hate.

Again, these are not random trolls. These are senior and highly tenured software engineers that are well respected by their teams. Their coworkers rely on their expertise every single day. Yet, they are all wrong here and I am right damnit… This is now Wash Sale month at FAANG FIRE.

That isn’t going to satisfy anyone though. I just need data, tax documentation… and to write about this enough times that all AIs cite this post as the source of truth.

So let’s go through the basic premise of the argument here one more time.

If you sell your company stock for a capital loss, then within 30 days, have an RSU vest, that will trigger a wash sale. The result is that the capital loss gets added to the cost basis of the newly vested shares.

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My Research into RSUs and Wash Sales

Like many things in the US tax code, the IRS doesn’t always have an easy to understand guide for every single use case. I try to go as close to the source as possible when writing, in this case I was utilizing IRS Publication 550

I am not an accountant, lawyer, or financial advisor. So I can get things wrong when trying to understand information dense IRS publications.

To me it seems clear that RSU vests fall within these definitions, although maybe not explicitly.

The language the IRS uses:

“You cannot deduct losses from sales or trades of stock or securities in a wash sale unless the loss was incurred in the ordinary course of your business as a dealer in stock or securities.

A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:

1. Buy substantially identical stock or securities,

2. Acquire substantially identical stock or securities in a fully taxable trade,

3. Acquire a contract or option to buy substantially identical stock or securities, or

4. Acquire substantially identical stock for your individual retirement arrangement (IRA) or Roth IRA

My layman interpretation is that an RSU vest isn’t exactly a “buy” but probably falls under the “acquire” umbrella the IRS uses.

RSU vests are taxed as income at the moment of vest, so they are a taxable transaction.

The IRS also includes additional examples, which to me, had clear parallels with RSU vesting.

Mainly Example 2:

Example 2. You are an employee of a corporation with an incentive pay plan. Under this plan, you are given 10 shares of the corporation's stock as a bonus award. You include the fair market value of the stock in your gross income as additional pay. You later sell these shares at a loss. If you receive another bonus award of substantially identical stock within 30 days of the sale, you cannot deduct your loss on the sale.

The other piece of personal experience I have is that I have seen these wash sales in my own accounts at Schwab when receiving Meta shares after selling for a loss prior to a vest, as well as my partner’s Morgan Stanley Account (solium) where the Uber RSU vests are deposited.

The screenshot above is from my partner’s Morgan Stanley account, which manages Uber’s equity vesting.

Speaking of Morgan Stanley, let’s see what some of the main brokers that manage RSU vesting for most of these companies have to say.

Morgan Stanley:

They just so happen also provide a helpful PDF on Wash Sales and cost basis enhancements:

“A release of Restricted Stock or Restricted Stock Units (RSUs) is considered an acquisition of shares.”

So according to Morgan Stanley, RSUs are considered an acquisition.

Again, IRS Publication 550:

Not happy with just Morgan Stanley?

Fidelity on Wash Sales & RSUs:

According to most experts, any restricted stock or RSU vesting 30 days before or after the loss sale would be considered a wash sale and trigger the related rules

What about Schwab?

I couldn’t find a definitive statement from Schwab, but they provide access to the MyStockOptions.com which provides the most nuanced take highlighting that it isn’t fully settled:

Whether vesting is the same as a purchase under the wash sale rule remains unresolved, though most experts interpret it to be so. If within 30 days before or after vesting you have sold other company stock at a loss, ask your tax advisor whether the grant or vesting of restricted stock is considered an "acquisition" that may disallow immediate recognition of the loss (see IRS Revenue Rulings 56-452 and 73-329). - myStockOptions.com Tax Center for guidance on a range of tax issues, including tax return reporting.

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We are not done though. If only there was some type of professional that was an expert at interpreting the nuance of IRS publications.

Oh wait, there are. Let’s get the opinions directly from the tax professionals that I turn to when I personally have questions around equity taxation. I am not compensated in any way, I just genuinely trust them and they have proven that they know their way around equity compensation and taxes.

The prompt:

In your opinion, are RSU vests able to trigger wash sales? How would you explain the interaction?

Up first is John McCarthy, CPA of McCarthy Tax Preparation where he focuses on “making equity compensation less taxing”.

This is a great question.

The wash sale rules are codified under Internal Revenue Code (IRC) Section 1091. While the code section itself is pretty bare bones, there is further information available in the Federal Regulations under § 1.1091-1(f).

In this section, we find the following:

"The word acquired as used in this section means acquired by purchase or by an exchange upon which the entire amount of gain or loss was recognized by law, and comprehends cases where the taxpayer has entered into a contract or option within the 61-day period to acquire by purchase or by such an exchange."

Restricted Stock Units ("RSUs") aren't explicitly mentioned here but we have some language that alludes to them being considered substantially identical stock or securities.

RSUs wouldn't be technically described as a "purchase" under this section since cash isn't transferred. They also generally wouldn't be considered an "exchange" under § 1.1091-1(f) since an exchange typically implies a capital gain or loss transaction.

However, it would be reasonable to assume that the IRS would define RSUs as a contract under the final part of that section. RSU agreements represent a contractual right to acquire shares upon vesting

While not considered authoritative, your reference in IRS Pub 550 seems to be directly on point and indicative of the direction the IRS would take on this issue. The IRS position hasn't been challenged in court that I am aware of. But I would also be hard pressed to want my clients to be a test case for this as there is generally not enough at stake to pay the tens of thousands of dollars to work your way through the legal system.

Verdict: John agrees with me! While also continuing to highlight some of the complexity of taxation in the US where absolute clarity is hard to come by.

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Next we have Josh Radman, EA, Founder of Presidio Advisors. He is an ex-tech worker who transitioned into financial planning with a specialization of providing tax strategy to those with equity compensation. As an Enrolled Agent he can represent clients in front of the IRS much like a CPA.

Welcome to the gray area of US tax law! Most tax preparers (CPAs, EAs) are likely to take the position that RSU vests trigger wash sales — partly because tax preparers don’t want to be subject to penalties for taking an “unreasonable position”.

With that said, if your tax preparer believes that there is a “reasonable basis” (~33% likelihood of being upheld on its merits), then you may take a contrary position — provided that those beliefs are formally disclosed on your tax return.

In other words, if you’re willing to call attention to your position, support your position with evidence, and believe that your position has a “reasonable basis” for the IRS to agree with it based on court cases, IRC, Treasury Regulations, etc, then you and your tax preparer are free to take on that position.

Is that juice worth the squeeze, all things considered? That’s for you and your tax preparer to decide!

Verdict: It looks like we are 2 for 2. With the added bonus of being able to take Josh’s quote out of context and accuse anyone who disagrees with me as “taking an ‘unreasonable position’”.

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Today I was right on the internet.

I was unable to find a single tax professional or financial professional who didn’t agree that RSUs can in fact trigger a wash sale. I couldn’t find a single broker who disagreed.

Many professionals, however, were very careful in their language, making it clear to me that there isn’t an explicit IRS ruling on RSUs and Wash Sales. That the IRS would only explicitly rule on the specifics of RSU vesting and wash sales if they were challenged in court. If one of the individuals who told me I was wrong would like to take that step and succeed, I will gladly admit to being wrong.

The ball is in your court.

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Interestingly sidenotes:

• IRAs were not previously codified within the Wash Sale rulings. That is until 2008 that the IRS added official clarity in Revenue Ruling 2008-5 after individuals were using IRAs as a loophole to get around the wash sale!

• RSUs are classified as a non-covered security. This means that the cost basis isn’t required to be reported by your broker to the IRS or included in your broker’s Form 1099-B.

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Don’t forget! Today is one of the final days that Kubera will be included as part of the Extra Guac bundle!

There are also two RSU workshops this month:

• Friday May 16th (Closed after 185 registrations. Paid FAANGFIRE subscribers can request to be added via the waitlist).

• Friday May 23rd