Unlocking the Mystery of Capital Gains Taxes (Including the Wash Sale Rule)

June 06, 2025

Understanding capital gains and losses is important for managing investments and taxes. The IRS says almost everything you own and use for personal or investment reasons is a capital asset, like your home, stocks, and bonds. When you sell any of these, you either make a profit (a gain) or lose money (a loss). Profits and losses may increase or decrease the amount of tax you owe, depending on how long you’ve owned the asset.

Capital gains and losses can affect how much tax you pay in the year you sell your assets, but remember, if you sell personal things like your home or car, you can’t use those losses to lower your tax bill. For now, let’s focus on investments.

Short-term or long-term

There are two types of gains and losses: short-term and long-term. If you’ve owned something for one year or less, it’s considered short term. If you hold on to it for more than one year, it’s considered long term. This matters for tax purposes because short-term and long-term gains have different tax rates. Keep this in mind when selling investments in a taxable, non-qualified brokerage account.

How the sale of an investment is taxed

Here’s how to figure out how your investments will be taxed:

First, calculate gains and losses on assets you’ve held for one year or less (i.e., short-term assets). To determine a gain or loss, take the proceeds from the sale of each asset and subtract the amount you paid for it (i.e., its cost basis). The result is either a gain or a loss. Subtract short-term losses from short-term gains to find your net short-term gain or loss.

Next, calculate gains and losses on assets you’ve held for more than one year (i.e., long-term assets) using the same process. Subtract long-term losses from long-term gains to find your net long-term gain or loss.

If you have a net long-term gain and a net short-term loss: Subtract your short-term loss from your long-term gain to get your “net capital gain or loss.” Long-term gains are taxed at lower rates than your income. The rate can be 0%,15%, or 20% depending on your income. There may also be an extra 3.8% Medicare surtax. State tax rates can be different, so check with your local tax office.

If you have a net short-term gain and a net long-term loss: Subtract the long-term loss from the short-term gain. Any remaining gain will be taxed at your tax bracket based on your income level.

If you have both a net short-term gain and a net long-term gain: The short-term gain will be taxed at your regular income rate, while the long-term gain will have its own lower rates.

If you have a net loss, you can subtract up to $3,000 of losses from your other income on your tax return. If you have more losses, you can use them in future years.

The Wash Sale Rule

Lastly, there’s a rule called the wash sale rule. If you buy back the same investment (or one very similar) within 30 days before or after selling it, you cannot claim a loss on your tax return for that sale. You can, however, add the loss to the cost of the repurchased investment and benefit from the loss down the road when you sell that investment. Capital gains taxes can be tricky, but a tax professional can help you understand them better. To learn more, check out IRS Tax Topic 409, Capital gains and losses.

How are Restricted Stock Units (RSUs) Taxed?

June 06, 2025

Restricted Stock Units (RSUs) are a form of equity compensation. They are awarded as company stock and can be viewed as part of an employee’s overall compensation package. How this form of compensation is taxed can be tricky, so it is important to know the ins and outs so that there are no surprises come tax time.

RSU Basics

RSUs are typically awarded when an employee starts their job and/or on a regular basis at the discretion of the employer. When RSUs are awarded, the employee does not own them yet. Ownership comes according to a predetermined timetable known as a vesting schedule. For example, an award of 1,600 shares may vest 100 shares per quarter for the next 16 quarters (four years). As shares vest, employees can sell the shares as needed to generate cash. The selling of shares may be subject to restricted trading windows, so employees should check with their employer on that. Here is a breakdown of when and how employees are taxed on RSUs:

Taxation At the Time of Award

Unless your RSUs are immediately vested, they are generally not taxed at this time.

Taxation At the Time of Vesting

The vesting of your shares is a taxable event. The value of the shares that vest is taxed as ordinary income in the year that the vesting occurs, even if you don’t sell the shares. For example, if 100 shares vest on May 15th and the value per share is $50, $5,000 (100 shares x $50 per share) will be added as taxable income for the year.

The amount of federal taxes owed depends on your tax bracket which is determined by your overall tax situation for the year. Depending on your state of residence, state and local taxes may be owed as well. Note that the employer may automatically sell a certain amount of shares to be used for tax withholding at the federal and state levels, if applicable. Check with your employer to see if the number of shares sold for withholding can be changed to reflect your anticipated overall tax situation.

Taxation At the Time of Sale

The sale of vested RSUs is a taxable event as well. You will have to pay capital gains tax on any appreciation of the value of the stock from the time of vesting to the time of sale. Building on the example above, if the 100 shares are later sold for $60 per share (a total value of $6,000), you will owe capital gains tax on the $1,000 of appreciation (i.e., $6,000 sale value – $5,000 cost basis).

There are two types of capital gains:

Short-term capital gain. If the time between vesting and selling is one year or less, it will be a short-term capital gain and taxed as ordinary income for the year. 

Long-term capital gain. If the time between vesting and selling is more than one year, it will be considered a long-term capital gain and will be subject to long-term capital gains tax rates. 

Generally, less taxes are owed with a long-term capital gain, but you should always compare short- and long-term gains to identify which sales would reduce tax liability most effectively. If the value of the shares when sold is less than the value when they vested, this will incur a capital loss that may be used to offset capital gains in the same year (but be aware of the wash sale rule).

Pro Tip: If you don’t intend to hold on to them very long, consider selling shares that vest immediately to minimize taxes.

If you are fortunate enough to receive RSUs as a form of stock compensation, it’s important to understand how they are taxed as part of an overall tax planning strategy. As with many tax matters, it’s a good idea to consult with a tax professional to get advice on your specific tax situation.

Mega Roth Conversions

February 09, 2025

What To Do If Brokerage Firms Don’t Report Wash Sales for RSUs

February 05, 2025

The amount of data that flows through the services of large record-keeping institutions is mind-blowing. But, as much as we rely on them for accuracy in reporting, we also need to record and monitor our own cost basis for tax purposes.

Restricted Stock Units (RSUs) are a popular form of employee (stock) compensation many companies use. RSUs allow employees to earn stock in their company over time, often as a reward for meeting performance targets. However, when it comes time to report these RSU awards on tax returns, combined with the subsequent purchases and sales of the company or other stock, many employees can be confused and frustrated with broker reporting. Careful planning can help maximize your return and prevent costly mistakes.

Cost basis is the original price for a given security, whether purchased or vested. The cost basis of stock from an RSU is typically the fair market value at the time of vesting. When the stock (received after vesting of RSUs) is ultimately sold or transferred, either in part or in full, the cost basis is used to determine the taxable gain or loss on the transaction.

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

  • Buy, or vest in, substantially identical stock or securities (SISS),
  • Acquire SISS or securities in a fully taxable trade,
  • Acquire a contract or option to buy SISS, or
  • Acquire SISS for your IRA, Roth IRA, SEP, or Simple,
  • Sell stock, and your spouse or a corporation you control buys a substantially identical position.

Note: Vesting in RSUs is considered an acquisition for wash sale purposes. If you sell shares within 30 days of vesting, you may not be allowed to deduct your loss on the sale (see Example 2 from the Wash Sales section of IRS Publication 550).

If your loss was disallowed because of the wash sale rule, all is not lost! You would add the disallowed loss to the cost of the new stock or securities (although this would not be meaningful in an IRA because IRAs are not subject to capital gain tax treatment). The result is an increase to your basis in the new stock or securities. This adjustment postpones the loss deduction until the new stock or securities are sold. Your holding period for the new stock or securities includes the holding period of the stock or securities sold (long-term vs. short-term).

Unfortunately, firms are not required to add disallowed losses to the cost basis of equity compensation, such as RSUs, when a wash sale occurs. This lack of reporting makes it difficult for employees to accurately report these types of sales on their taxes. In the absence of wash sale reporting, employees should take steps to keep accurate records of their RSU/stock activities. This includes recording the grant date, the fair market value at the time of vesting, and any subsequent sales or transfers of the stock from RSUs or purchase of the same stock outside of the employee’s RSU benefit. If the stock generates dividends, those will also need to be recorded. By maintaining these records, you’ll have the information you need to report activity on your tax returns accurately.

Firms are also not required to calculate wash sales on options trading. This places an additional burden on the taxpayer when it comes to accurately reporting sales activity on tax returns.

Lastly, suppose you hold the same stock or a substantially similar investment (like a mutual fund or ETF) through other brokerage firms, and a wash sale is triggered. In all wash sale cases, you are responsible for calculating and reporting this information when filing tax returns. You would gather all your account activity and 1099-B forms from multiple brokerages and use Form 8949 to report buy/sale information for your taxes.

The lack of reporting by firms for RSUs has created a significant burden for employees and tax professionals. Until more comprehensive reporting requirements are implemented, employees should take the necessary steps to keep accurate records of RSU activities to avoid any tax issues. Consult with a tax professional if you have any questions or are unsure how to proceed, especially if you live or work in multiple states and countries. By making informed decisions, you can maximize your returns and minimize your taxes regarding RSU investments.

Three Ways to Skin the Asset Allocation Cat

December 02, 2019

Over the past several weeks, you’ve heard me talk a lot about investing and for good reason. Investing is one of the most important parts of any financial goal or wealth accumulation strategy. The problem, like with most things, is that there is no one perfect way to do it. You probably know the basics—diversify, re-balance, dollar-cost average—but did you realize that there are at least three forms of asset allocation? Knowing what they are, how they are different, and which one may be right for you could make you a better investor over time.

Strategic asset allocation

Strategic asset allocation is the one you are probably most familiar with and the one most often used by financial advisors and professionals. The objective of strategic asset allocation is to find an optimal portfolio that offers the highest potential return for any given level of risk. It usually starts with a risk tolerance assessment, followed by a recommendation of how you should split up your assets between stocks, bonds and cash.

Rather than being a typical buy-and-hold strategy, strategic asset allocation requires ongoing attention as certain asset classes perform differently at different times. As such, rebalancing is a key component of strategic asset allocation. Since rebalancing causes investors to sell out of asset classes that are outperforming in order to buy into asset classes that are underperforming, it forces the investor to buy low and sell high. For this reason, some might consider it a contrarian approach to investing.

Buying low and selling high is one potential advantage of strategic asset allocation. Another is reduced volatility. By keeping the ratio of stocks to bonds within a targeted range, potential returns are also expected to stay within a certain range. Investors can implement a strategic asset allocation strategy in a number of ways, including following the guidance of a financial advisor, using an online financial advisory service, or by investing in a target-date fund.

Tactical asset allocation

Ironically, what a lot of investors may think they are getting when they hire a financial professional is tactical asset allocation. The objective of tactical asset allocation is to improve portfolio returns by periodically changing the investment mix to reflect changes in the market. It may seem logical to move assets into fixed income when interest rates are high and away from fixed income when interest rates are low, but tactical asset allocation involves security selection and market timing—two things that are often considered taboo in the investment universe.

Tactical asset allocation can be as simple as sector rotation, such as moving assets away from the best performing sector to the worst performing sector, or as sophisticated as using charts and graphs to try and predict market movements. Style preference (growth v. value) can also be important when using a tactical asset allocation strategy. Investors should exercise caution when using a tactical asset allocation approach as market trends can sometimes last longer or shorter than expected.

Since the goal of tactical asset allocation is to try and increase performance by timing the market and moving money around, it would be appropriate for an investor with a high tolerance for risk, a low sensitivity to taxes, and an ability to devote time to developing and monitoring buy and sell indicators. Investors that wish to utilize a tactical asset allocation strategy should decide whether they will use actively-managed mutual funds, passively-managed index funds or ETFs, or individual securities. Investors may be able to implement this strategy with a financial advisor or on their own through a self-directed brokerage account.

Core/satellite asset allocation

If you are not sure which approach to take, why not take both? The objective of core/satellite asset allocation is to enhance performance by investing in two portfolios. The larger of the two (i.e., the core) typically represents 60-80% of the total portfolio and uses strategic asset allocation for determining its holdings. The remaining share (i.e., the satellite) uses tactical asset allocation to take advantage of market opportunities as they arise. For the core component, you may want to use low-cost index or exchange traded funds (ETFs) and rebalance periodically. For the satellite portion, you can use any combination of funds, individual securities, real estate (e.g. REIT), commodities, options, etc., based on where you see market opportunity.

The benefit of this approach is that it gives you a disciplined investment strategy via the core while still allowing you to “play” the market with the satellite portion. If you make some good investment decisions with the satellite, you enhance your return. If your investment instincts are not so great, you still have the core working for you.

The core/satellite approach may be appropriate for investors that want to test their knowledge of investing against the market by comparing the performance of the satellite to that of the core. It would also be appropriate for investors that want to get more involved in investing but not all at once. Because there is a tactical component, investors will need to consider how much time they can devote to managing the portfolio before taking this approach.

As you can see, there are several ways to build an investment portfolio. Choose the one that is right for you based on your objective and level of involvement. And don’t forget to get help when needed.

What Are Your Funds Really Costing You?

October 16, 2015

In one of my recent conversations with an employee preparing for retirement, we covered a lot of territory over a number of sessions. In running his retirement projections, he was WAY ahead of the curve. He had his estate plan prepared by an excellent attorney. Continue reading “What Are Your Funds Really Costing You?”

How New Online Tools Will Save One Woman Tens of Thousands of Dollars Per Year

April 30, 2015

Last week, I wrote about my three favorite online investment services. This week, I’ll show you an example of how a couple of those tools saved a friend’s mother tens of thousands of dollars. When I spoke to my friend, his mother had just retired with a $1 million portfolio and he wanted to know how she should invest it for retirement. Since we can’t provide specific investment advice at Financial Finesse, this was a rare opportunity for me to be more hands-on. Here’s what we did: Continue reading “How New Online Tools Will Save One Woman Tens of Thousands of Dollars Per Year”

3 Tools That Can Make Your Investing Simpler and Cheaper

April 23, 2015

Last week, we discussed the three keys to successful investing being properly diversified, minimizing costs, and re-balancing periodically. Over the last few years, we’ve seen the emergence of online automated investment services (often called “robo-advisors”) that aim to make these steps even easier. After reviewing the various options, there are three in particular that I really like. Here’s a comparison of how each of them can help you with the three steps and what type of person they might each be best suited for: Continue reading “3 Tools That Can Make Your Investing Simpler and Cheaper”

3 Investment Myths Busted

February 26, 2015

Think you know everything you need to know about investing? I recently read three articles that dispel some conventional wisdom when it comes to your investments. Here are the busted myths along with the implications of what they could mean for you: Continue reading “3 Investment Myths Busted”

How to Invest: A Tale of Two Investment Theories

August 06, 2014

My first exposure to investment theories was during an economics class I took in college. I was always sort of a geek when it came to graphs and numbers—which I guess explains my degree in statistics—so I was captivated when the professor drew an example of the efficient frontier on the chalk board. It made perfect sense to me. Continue reading “How to Invest: A Tale of Two Investment Theories”

Can You Beat the Market…With Index Funds?

June 19, 2014

Last week, I wrote about different types of index funds and how some “index funds” aren’t as diversified or as low cost as they may seem. However, there’s also a case for certain types of diversified index funds that are designed to outperform traditional index funds. They come in two flavors: equal weight and fundamental index funds. Continue reading “Can You Beat the Market…With Index Funds?”

Stock Investing Made Easy

May 08, 2014

Last week, I wrote about some of the benefits of investing directly in individual stocks. However, it can be challenging to decide which stocks to invest in. Here are some tools that can help simplify that process.      Continue reading “Stock Investing Made Easy”

Time to Dump Your Mutual Funds?

May 01, 2014

No, I’m not talking about “sell in May and go away.” If you invest in stocks, you probably do so through mutual funds. After all, they’re available in your employer’s retirement plan and you get a degree of instant diversification even if you don’t have much to invest. But here are some reasons you might want to consider investing directly in individual stocks: Continue reading “Time to Dump Your Mutual Funds?”

Could Asset Location Make Your Investments More Tax Efficient?

September 20, 2013

What happens when you get a group together that consists of financial planners, CPAs, estate planning attorneys and investment managers? Usually when that happens for me, it means that a bunch of my friends are getting together to go watch one of our friend’s bands play or we’re playing poker. And, it also means that the topic is eventually going to become a financial one and inevitably there will be people on opposite sides of an issue so debate is a certainty.  The great thing about the debate is no matter what side you’re on, you learn something you didn’t know before the debate. One of our recent debates was about asset location.  Continue reading “Could Asset Location Make Your Investments More Tax Efficient?”

How to Invest for Income When Rates Are Rising

September 19, 2013

One of the biggest challenges facing current and future retirees is shifting from investing for growth to investing for income. This is especially difficult in today’s environment of low and possibly rising interest rates. Let’s start by taking a look at some options for getting investment income in retirement: Continue reading “How to Invest for Income When Rates Are Rising”

Should You Invest in a “Motif?”

September 12, 2013

A friend of mine recently asked me what I thought of a site called Motif Investing. The idea of the site is that it allows you to buy a basket of up to 30 stocks or ETFs based on an idea or “motif.” Some popular examples are stocks benefiting from things like the rise of 3D printing or biotechnology, stocks  that have recently suffered a sharp decline, or stocks with good dividend payouts. The weighting of each motif can be customized and individual stocks or ETFs can even be removed. It costs $9.95 to purchase, sell, or re-balance each motif. So is this a good way to invest in stocks? Let’s take a look at the pros and cons: Continue reading “Should You Invest in a “Motif?””

Have You Outgrown Your Mutual Funds?

September 27, 2012

When it comes to investing, many of us stick to mutual funds. After all, they’re generally the only option in employer retirement plans (except perhaps for company stock) and financial advisers like to sell funds because they’re relatively easy for them to manage. They also make a lot of sense when you’re just starting out with investing and don’t have enough to purchase in individual securities. However, as your portfolio grows, you may want to consider purchasing individual securities, especially if your portfolio is taxable. Here are some reasons why: Continue reading “Have You Outgrown Your Mutual Funds?”

All in the Family: Intra-Family Loans

September 26, 2012

The current low level of interest rates can be either a bane or a boon, depending on your perspective. If you are in the market to borrow for a major financial purchase or investment and have decent credit, the situation is looking mighty good. New car loans are running between 3 and 4 percent, mortgages are now as low as less than 3%, and some federal student loans have again been pegged by Congress at 3.4 percent. Continue reading “All in the Family: Intra-Family Loans”

A “Must Do” If You Hold Company Stock in Your 401(k)

April 30, 2012

The bottom line is employees must love the companies they work for.  It’s not that they wear the company t-shirt and logo hats and drink out of their insulated mugs. That isn’t how I can tell.  It’s in their portfolios.  When they ask me to review their portfolios, the employees who hold company stock tend to go overboard.  I’ve seen 401(k)s with 90% in company stock and many have well over 20%.  When we talk about the risks of having more than 10% of assets in one stock, they smile politely and say, “I know.”  But many don’t do anything about it.  Continue reading “A “Must Do” If You Hold Company Stock in Your 401(k)”