U.S. TAX GUIDE IN MEXICO
Do RSUs and employee stock options in Mexico need to be reported on the US tax return when sold?
Yes. When you sell RSUs (restricted stock units) or employee stock options received as part of your compensation package from a multinational organization in Mexico, the sale must be reported on your US tax return.
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What are Restricted Stock Units (RSU)?
Restricted Stock Units (RSUs) are a form of compensation issued by an employer to an employee in the form of company shares. These shares are given to employees as part of their compensation package, but with certain restrictions and conditions attached.
Here are the key characteristics of RSUs
- Vesting Schedule: RSUs typically come with a vesting schedule, which means that employees receive the shares only after certain conditions are met, such as a specific period of employment or performance targets.
- No Voting Rights or Dividends: Until the RSUs vest and the employee takes ownership of the shares, the employee usually does not have voting rights or receive dividends.
- Grant Date vs. Vesting Date: The grant date is when the RSUs are awarded, while the vesting date is when the employee actually takes ownership of the shares.
What does it mean for RSUs to vest?
When RSUs (Restricted Stock Units) “vest,” it means that the employee has met the conditions required to take ownership of the shares.
How do RSUs work?
- Grant: An employer grants RSUs to an employee as part of their compensation package.
- Vesting: The RSUs vest according to the specified schedule, which can be based on time, performance, or other criteria.
- Delivery: Once vested, the RSUs are converted into shares of company stock and delivered to the employee.
- Sale: The employee can then hold or sell the shares, subject to any company-imposed trading restrictions.
How are RSUs taxed?
The taxation of RSUs occurs at several stages, from the grant date through to the sale of the vested shares.
When RSUs vest, the fair market value (FMV) of the shares is considered ordinary income, and it is subject to federal, state, and payroll taxes.
- Income Inclusion: On the vesting date, the value of the vested shares is included in the employee’s gross income. This value is based on the FMV of the shares on the vesting date.
- Withholding Taxes: Employers are required to withhold taxes on the value of the vested RSUs. This includes federal income tax, state income tax (if applicable), Social Security, and Medicare taxes.
- Reporting: The value of the vested RSUs is reported on the employee’s W-2 form as ordinary income.
After the RSUs have vested and the employee owns the shares, any subsequent sale of these shares will trigger capital gains tax, based on the holding period and the difference between the sale price and the FMV at vesting.
- Short-Term Capital Gains: If the shares are sold within one year of the vesting date, any gain is considered short-term capital gain and is taxed at ordinary income tax rates.
- Long-Term Capital Gains: If the shares are held for more than one year after the vesting date, any gain is considered long-term capital gain and is taxed at the lower capital gains tax rates.
What is the process for reporting the sale of stock received as part of my compensation?
First, you need to determine if the stock was taxed at the time of exercise.
This establishes the stock’s cost basis. When you sell the stock, you calculate the proceeds from the sale minus the cost basis to determine the gain or loss.
This gain or loss is then reported on your US tax return.
How does the holding period affect the tax calculation?
The holding period of the stock impacts whether the gain is considered short-term or long-term, which in turn affects the tax rate.
Short-term gains (held for one year or less) are taxed at ordinary income tax rates, while long-term gains (held for more than one year) are taxed at lower capital gains rates.
Ordinary Income Tax Rates:
- 10%: Up to US$11,600
- 12%: US$11,601 to US$47,300
- 22%: US$47,301 to US$97,750
- 24%: US$97,751 to US$190,750
- 32%: US$190,751 to US$364,200
- 35%: US$364,201 to US$462,500
- 37%: Over US$462,500
Long-term Capital Gains Tax Rates:
- 0%: Up to US$44,625 (single) or $89,250 (married filing jointly)
- 15%: US$44,626 to US$492,300 (single) or US$89,251 to US$553,850 (married filing jointly)
- 20%: Over US$492,300 (single) or US$553,850 (married filing jointly)
Suppose you received stock options from your employer, exercised them at a cost basis of US$10,000, and later sold the stock for US$15,000. You would report a gain of US$5,000 (US$15,000 – US$10,000).
If you held the stock for over a year before selling, the US$5,000 gain would be taxed at the long-term capital gains rate.
Why is it important to keep accurate records of RSUs and stock options?
It is important to keep accurate records of the date you received the stock, the exercise price, and the sale price for accurate tax reporting.
This documentation helps calculate the cost basis and determine the holding period, ensuring the correct tax treatment on your US tax return.
What should I do if I am unsure how to report RSUs and stock options?
If you need help with how to report RSUs and stock options, it is advisable to consult a tax professional.
They can help you understand the complexities of tax reporting for these types of compensation, ensuring compliance and optimizing your tax outcomes.
