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Tax-efficient Exit Strategies For IPOs with RSU

Understanding the basics of IPO is crucial for company’s successful transition from public to private entity. The employees working in the US who currently hold RSUs—restricted stock units—an IPO can indeed be an important life event that allows them to get control over their equity compensation. But how much a RSU holder can profit from their equity compensation depends on the varying US tax laws. 

In the article ahead, we will explore in detail the interplay between RSUs and IPOs as per current US tax laws for the fiscal year 2024. 

What is RSU?

Equity compensation has many forms; one such is an RSU. An employee, with an RSU, as per the company policies and updated tax laws, is eligible to receive shares of the invested company stocks after meeting specific defined conditions; some of these conditions include company based goals, time based vesting schedules, etc. RSU primarily differs from other stock options as it comes with zero upfront costs. 

RSU and US Tax Regulations

RSUs and tax regulations are directly proportional to each other. Moreover, RSUs, upon vesting, are defined by the state of the company, whether the company is privately owned or publicly limited at the vesting time. 

What are Public Company RSUs?

Usually, after an IPO, an RSU vests in a publicly owned entity, and the employee understands and accepts its ordinary income equivalent to that of the fair market value, abbreviated as FMV, of the subjected stock on the date of vesting.  

The employee, therefore, is responsible for income tax legalities on this ordinary income as per the current marginal tax rate. But it is noteworthy here that no capital gains tax, at this stage, will be determined.

What are Private Company RSUs?

The tax related regulations and vesting statements for RSUs with regard to a private company are even more complex. According to the updated tax laws in the US, at the date of vesting, the employee does not accept or recognize the implied income tax legalities.

But at the time of the sale of those vested shares, the profit the employee is entitled to will be subjected to capital gains tax. The approximate difference between the sale price and the stock FMV as of the vesting date will determine the value of this capital gains tax. 

Through an IPO, a private company can be easily transformed into a public limited entity. This transformational change in the original company status invites both the taxation and vesting of RSUs, as per the company’s defined legal terms and agreements. 

Tax-efficient Exit Strategies For IPOs with RSU

The capital gains tax on RSU holders is a legal phenomenon that must be dealt with accuracy and patience. If a RSU holder is not able to successfully abide by the legal phenomenon, they might have to face unwanted penalties that may risk their incoming stock profit/gains. 

However, as an RSU holder, here is a list of tax planning strategies you could adopt in order to optimize implied capital gains tax:

  • Seek assistance from tax advisor:

A qualified tax advisor, in the challenging times of tax optimization after an IPO, is highly recommended to navigate the legal terms and help you successfully mitigate tax redundancies. If you’re in the US and you need professional tax assistance, DimovTax.com is the perfect solution!

  • Diversification: RSUs can be understood as a value of the company’s stock performance. Moreover, an RSU can also be considered a part of the employee’s overall financial health. Therefore, diversification can be one of your effective tax planning strategies for successful tax optimization. 

Bottom Line:

An IPO gives RSU holders an opportunity to successfully access their equity compensation value. But this value can only be successfully determined and calculated if tax laws are carefully implemented. 

A layman is unaware of basic tax knowledge, and handling sensitive stock and IPO information must require expertise. Therefore, expert guidance is of crucial significance not only for the successful determination of equity compensation but also for maximizing the after-tax benefits. 








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