Income Tax on RSU - Stock crashed 80% during lock period after IPO

Question

My company went IPO last year, and I had about $1 Million worth of RSUs at time of RSU vesting. 22% of the RSU (220K) were sold to cover the federal supplemental income tax. In total, about 43% of the $1 Million RSUs were sold to cover various tax including California income tax. In the end, I had about 540K after tax.
However I was not able to sell my stock at that time due to IPO initial lock up, and when I was finally able to sell my stock, the stock price crashed 80%, and I was only able to sell them for 128K.
My question is, when I file tax return, what should I file for gross income, 1 Million or 128K?
Thanks

chepner · Accepted Answer

You will report $1,000,000 in gross income. However, you will also report $220K in federal tax paid. Whether you will owe any additional income tax or receive a refund of some portion of it will depend on the rest of your tax return.
Both the income and the withholding should appear on your W2, as it will simply be lumped together with the rest of your salary and other compensation. It's not the RSUs that are taxed, but rather your total taxable income for the year. Likewise, you aren't paying taxes based on your final taxable income, but rather paying the difference between what you owe and what you have already paid. (When that difference is negative, you get a refund.)

For the sale, you will be able to claim a capital loss, as you sold it for much less than your cost basis. Your cost basis was $540,000, and you sold it for $128,000; that equals a loss of about $312,000. In general, you can use a capital loss to offset another capital gain or other taxable income; the details vary between federal and state, as well as from state to state, and is the topic for another question.

Income Tax on RSU - Stock crashed 80% during lock period after IPO

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