If you have been accumulating RSUs or performance awards for a few years, there is a good chance your equity compensation is now one of the largest line items in your financial picture. There is also a good chance that when you decide to take some of it off the table, you are doing so in a way that costs significantly more in taxes than necessary.
Today, we’re not going to look at the question of whether you should sell. We’re going to look at a more often overlooked detail–which RSUs you sell.
The Problem With "Just Take $200,000 Off the Table."
When executives decide to liquidate a portion of their equity, the most common approach is straightforward: pick a dollar amount, log into the portal, and sell. It’s the simplest chain of events. What most people (in my experience) are not doing is reviewing the individual tax lots before executing.
Your equity position is not one thing. It is actually a collection of grants, each with its own vesting date, its own cost basis, and its own tax treatment depending on how long you have held it since it vested. Every lot you sell triggers a different tax outcome, and the difference between choosing the right lot and the wrong one can run into five figures on a single transaction.
Here is how that plays out in practice.
Say you want to take $200,000 of equity off the table. You are in a combined federal and state bracket of around 43%. Your position includes several lots:
Some that vested recently with almost no embedded gain
Some that vested eight or ten months ago and have a 20 to 25% gain, but have not crossed the 12-month threshold for long-term capital gains treatment
Some that vested over a year ago with similar gains but now qualify for long-term rates.
If you sell the lot that vested eight months ago, the entire gain is taxed as ordinary income at your 43% rate. If you wait another few months and sell after the 12-month mark, that same gain is taxed at the long-term capital gains rate, likely somewhere around 23% when you factor in state taxes and the Medicare Investment Income surcharge.
On $50,000 of gain, that difference is roughly $10,000 in unnecessary taxes. On a larger position, it scales accordingly.
The Right Way to Think About Which Lots to Sell
When we are working with a client who wants to reduce their equity exposure, the first thing we do is look at the composition of the position, not just the total value. The priority order generally looks like this:
Lots that just vested where income taxes have already been withheld on the full gross amount and there is little to no additional capital gain cooked in. These are the cleanest to sell from a tax standpoint.
Lots held longer than 12 months starting with the highest cost basis, which means the smallest embedded gain and therefore the lowest incremental tax hit.
Lots approaching the 12-month mark were waiting a few weeks before selling converts the gain from ordinary income rates to long-term capital gains rates.
The lots you generally want to avoid selling are the ones sitting in the short-term window with meaningful appreciation. Unless there is a strong reason to act (a blackout period, a significant concentration risk, a market event), paying ordinary income rates on gains that are weeks away from qualifying for long-term treatment is a preventable cost.
The Other Side of the Position
Selling the right lots is only half the equation. The other half is what you do about the lots you are not selling, the ones with embedded gains that have been building for years and will eventually need to come off the table.
This is where tax loss harvesting on the rest of your portfolio becomes part of the strategy. If you are systematically building up harvestable losses in other parts of your non-retirement portfolio, those losses can offset the capital gains you will eventually incur as you reduce your equity position over time. It is not a one-year conversation. It is a multi-year tax management framework built around the reality that you have a growing concentration that needs to unwind gradually and efficiently.
What the Calendar Controls
The most practical takeaway here is that the tax lot strategy is a calendar game. Vesting dates, blackout periods, 12-month holding thresholds. All of these create specific windows where the right decision changes. The executives who manage this well review it on a regular basis, not just when they feel like selling. We regularly do this as a part of our standard process for executives.
At a minimum, the conversation should happen around every vesting event, any time a corporate trading plan needs to be updated, and any time a blackout period is approaching, and there is a window to act before it closes.
The portal will tell you what you own. It will not tell you what to sell first.
Ready to build a tax lot strategy around your vesting schedule? Schedule a conversation: calendly.com/waynewagner/introduction
Illustrations are for educational purposes only and are not prescriptive. Individual tax situations vary. Consult a qualified tax advisor before making any decisions regarding equity compensation. Vizionary Wealth Management is an investment adviser registered with the SEC. CA# OF36700.