If you read my last blog post about the upcoming expiration of the Uber IPO lockup, you might have noticed that I barely mentioned tax and legal details.
And I make up for that lacunae (isn’t that a great word? A bit of a dollar word where a dime word would do, but I do love it so1) in this here blog post. When I wrote the first post, I really wanted to focus your attention on creating a high-level strategy that would best reflect and support your life goals and your values.
But if you peel back that one layer of the Uber onion, you start getting into the mucky tax and legal details of the actual implementation. And that’s what we’re going to dive into here. (I could get almost arbitrarily detailed, so this will still be somewhat summarized.)
What Your Taxes Are Going to Look Like
Did your RSUs vest on IPO Day? Or do you have Uber stock because you exercised options a while ago? Because taxes work very differently for each of those.
If Your RSUs Vested
Uber RSUs had a “double-trigger” vesting: first you had to be at Uber past a certain day, and second, the company had to IPO. So, if your RSUs fully vested on IPO day, you probably already owe taxes.
Why do you already owe taxes? I went into this with almost nauseating detail in this blog post.
As a refresher:
- RSUs that had already passed the vesting date (as specified in the vesting schedule in your RSU grant document) fully vested and were “released” on IPO day, May 10.
- On that day, they counted as “compensation income” to you, and you owed income taxes on them just as you do on your salary.
- Uber should have withheld the “statutory” 22% to pay your taxes, so it’s not as if you owe all the taxes. But if your tax rate is higher than 22% (and for most of my clients, it is), then you owe more taxes.
The big problem here is that you can’t sell them until the lockup period is over on November 6. This sucks for two reasons:
- You can’t sell shares to generate the cash for the tax payment.
- So far, that 6-month wait isn’t working out well for you: you paid taxes on the basis of a $45/share value, and as of now (September 9), it’s only worth $32/share. Let’s hope it gets back up to at least $45/share by November 6!
Oh, and, just a heads up: If you do owe taxes, you probably should be paying estimated taxes (instead of waiting for April 2020 and paying a penalty). And the Q3 estimated tax payment deadline is fast approaching: September 16. Paying estimated taxes is dead simple. Calculating them, more complicated.
If your strategy includes selling shares, these are the shares you want to sell first! Currently you have a loss in these shares, which means selling will actually reduce your taxes. And even if the stock gains value before November 6, it’d have to get significantly above $45/share for your tax burden to be significant.
If You Exercised Options
If you have Uber shares because you exercised options long ago, then the IPO itself didn’t affect your taxes.
But when you sell those shares, that’s when you’ll owe taxes on the gain.
Calculating those taxes depends on what your “cost basis” in the stock is. Cost basis is, more or less, what you paid to buy the stock. You will owe taxes on the difference between the price you sell it at and the cost basis.
Very simply, if you exercised at $1/share, and you sell it a $35/share, then you owe taxes on $34/share. Your cost basis depends on:
- the strike price you paid
- whether you exercised ISOs and NQSOs (which determines whether you owed taxes on exercise)
- the value of the stock on the day you exercised (this is known as the 409(a) value for private companies).
In any case, presumably your cost basis is a lot lower than the current stock price. Which means your gain will be big!
If You Have Both
If you have Uber shares from both vested RSUs and from exercised options, then you can be a bit clever in your approach to selling.
As of now, your RSU shares are at a loss. You know what happens when you sell stock at a loss? You actually get a tax break. You can use that loss to offset gains in other stock that you sell. In this case, gains in Uber stock from exercised options.
Here’s that “clever” (not really) scenario:
- You have 1000 shares by way of RSUs. At this point, you have 1000 x $10 loss/share = $10,000 in “capital losses.”
- You have 1000 shares by way of options, and altogether they have a “capital gain” of $10,000.
- You want to sell some shares of Uber ASAP because most of your net worth is tied up in Uber stock.
- You can sell all 2000 shares and not incur a nickel of tax liability. The $10,000 loss neatly cancels out the $10,000 gain.
(There are details in reality that make this a little more complicated, like the fact that your RSU shares will be “short-term” losses and your option shares might be “long-term.” But the overarching point remains!)
Some Logistical Recommendations for Your Taxes
I recommend you do two things to make this tax situation easier on yourself:
- When you sell shares at a gain (which, at this point, doesn’t include those RSU shares), set aside money for taxes right then and there.
Some people open a separate bank account to keep their tax money in. I think this practice of assigning a single, specific goal or purpose to each of your financial accounts is great. It makes it a lot easier for you to know how much money you have for what parts of your life.
- Get thee to a tax professional!
They should be able to do an estimated-tax calculation in just a couple hours. And you definitely want to know what kind of tax bill you’re looking at if you plan to sell a bunch of shares.
Restrictions on Trading Your Uber Stock
Even though Uber is public now, that doesn’t mean you can just trade Uber stock whenever you want. If you’re an employee (or even a contractor, I believe), then be sure to pay attention to these restrictions:
Trading Windows/Blackout Periods
During a blackout period, you are not allowed to trade in Uber stock. You are allowed to trade only during trading windows.
These “blackout periods” usually start a couple weeks before the company’s quarterly earnings call and end a couple days after. Earnings calls usually happen about 30-40 days after the close of the quarter. So, looking to this quarter:
- Q3 closes September 30.
- The earnings call should happen between October 30 and November 9.
- Which means it’s possible you could be in a blackout period when the lockup expires on November 6! We won’t know until the earnings call date is announced.
Some public companies have a set calendar specifically naming the trading window and blackout periods a year in advance. I don’t know if Uber will do that now that it is a public company.
Insider Trading/”Material, Non-Public Information”
Everyone who’s employed by Uber is subject to the blackout periods. But if you are privy to “material, non-public information” as part of your job at Uber, then you are even more restricted than that.
None of this mattered when Uber was private. Now that it’s public, you really need to get clear on your insider status.
The first thing you can do is to ask your company if you’re privy to material, non-public information, of if you’re subject to any inside-trading restrictions.
If you determine that you are not considered an insider, then whew! Your dodged a Hassle Bullet.
If you’re an insider, when can you trade? Will the company let you know? Is there a predictable, recurring, just narrow-er window? Are you left only with a 10b5-1 plan, which allows you to set up a selling schedule, but months ahead of time?
Nervous About Selling Shares?
Some people are anxious that they’ll go to sell a bunch of shares, and in the few seconds it takes to actually place and execute an order, the price will drop by a lot and they’ll unintentionally sell their shares at a much lower price. One way to protect yourself against this (or any unwitting selling at a lower-than-desired price) is to use a “limit order.”
With a limit order, you specify a price you don’t want to sell below. So when you go to sell the stock, if the stock price drops below that limit-order price, your shares won’t be sold. (Limit orders can get a little trickier than this; I’m only describing the high-level use. You are warned!)
Donating to Charity
If charitable giving is part of your strategy, then keep some high-level tax-optimizing tactics in mind:
- Donate what you got from exercising options. Don’t donate RSUs. You want to donate shares with the biggest gains.
- Donate long-term shares (shares you’ve held for at least 1 year), not short-term (held less than 1 year).
- If all you have is RSU shares that are at a loss, then sell the shares, get some tax benefit from the loss, and donate cash.
This blog post focuses on what happens with Uber stock you got before IPO or as of IPO day, because liquidity events at private companies can be particularly confusing. But now that Uber is public, RSUs and options work just as they do for any other public company. As of November 6, there’s nothing weird about Uber from a stock-compensation perspective. I’ve written some blog posts (here and here) about how to think about RSUs in a public company.
1In college, two friends and I took a course about landscape architecture together. Two of us promised to pay the third $1 (we were college students…we didn’t have much money) if she fit “meretricious” into our next paper. And by golly she did. How do we know that? Because the professor ended up reading that very passage from her paper out loud to the rest of the class.
Do you realize November 6 is going to be here sooner than you thought, and, um, yes, you really do need to figure out what you’re going to do? Reach out to me at email@example.com or schedule a free consultation.
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Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Meg Bartelt, and all rights are reserved. Read the full Disclaimer.