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RSU: sell to cover or cash to cover?
Category: tax
RSU’s (Restrict Stock Units) are the company stocks given to you usually for free, however upon receiving the shares vested, you have to pay tax based on the fair market value of the stocks as compensation (federal, state, and FICA taxes). There are two ways you can pay: sell some stocks (sell to cover which is default) or you come out with cash from your pocket.
Upon selling the stocks, you recognize a capital gain or loss. You pay long term capital gain rate up to 20% on capital gain if you hold it for more than a year, and ordinary income tax (federal, state income tax only without FICA) for short term capital gain or capital loss (tax savings).
Example:
 Number of shares vested: 100
 Fair Market Value per share on vesting: $90
 Sale price: $x
In this example, you pay compensation income tax at time of vesting on $90 per share, and you pay capital gain tax at time of sale on the proceed per share ($x  $90).
By the way, if you just copy from 1099B to Turbo tax without adjustment on cost basis, then you will end up with paying tax twice, and most of people do.
If you need more info on RSU taxation, please click here.
To better understand the pro and con’s of “sell to cover” and “cash to cover”, let us work out answers of different scenarios based on above example:

(a) If you sell to cover, and the stock price doubled after 1+ year and you sell it, what is the total gain after taxes?

(b) If you sell to cover, and the stock price become $0 and you sell it, what is the total gain or loss after taxes?

(c) If you cover with cash, and the stock price doubled after 1+ year and you sell it, what is the total gain after taxes?

(d) If you cover with cash, and the stock price become $0 and you sell it, what is the total gain (or loss) after taxes?
The answers are likely different for different people as their marginal tax rates are not the same. Let us work out specific answers for John Doe who is a single CA residents and has the following tax rates:
 Federal marginal tax rate: 24%
 State marginal tax rate: 9.3%
 FICA tax rate: 7.65% (suppose he has not reached the max yet)
 Compensation income marginal tax rate: 24% + 9.3% + 7.65% = 41%
 Ordinary income marginal tax rate: 24% + 9.3% = 33.3%
 Long term capital gain tax rate: 15%
So in his case, he needs either to sell 41 shares (leaving 59 shares on his account), or come up equivalent amount of cash ($90 * 41 = $3,690) to cover the taxes upon receiving the shares.
Let us also ignore the time value of money (today’s money worth more than the same amount of money in the future) in the calculation, however, if the loss is huge the time value of money can no longer be ignore as you won’t be able recover the capital loss within your life time since the allowed capital loss deduction is limited to $3,000 per year ($1,500 for married filing separately).
Answers:
[a] The total gain on sale = $180 * 59 = $10,620,
the taxable amount = [$180  $90] * 59 = $5,310,
the tax to be paid on capital gain = $5,310 * 15% = $797,
so the net gain is $10,620  $797 = $9,823.
[b] The total gain on sale = $0,
the taxable amount = [$0  $90] * 59 = $5,310,
the tax to be paid on capital loss = $5,310 * 33.3% = $1,768,
so the net gain is $0  [$1,768] = $1,768.
[c] The total gain on sale = $180 * 100 = $18,000,
the taxable amount = [$180  $90] * 100 = $9,000,
the tax to be paid on capital gain = $9,000 * 15% = $1,350,
so the net gain is $18,000  $1,350  $3,690 [cash to cover] = $12,960.
[d] The total gain on sale = $0,
the taxable amount = [$0  $90] * 100 = $9,000,
the tax to be paid on capital loss = $9,000 * 33.3% = $2,997,
so the net gain is $0  [$2,997]  $3690 [cash to cover] = $693.
So yes, you could have a net loss if you do not sell to cover or do not cover completely when stock price drops later on, and this is due to the difference between compensation income tax rate [with FICA] and ordinary income rate [without FICA], and the time value [take long time to recover or not be able to recover during one’s life time].