Managing NVDA RSUs
In what seems like just a couple years, Nvidia (NVDA) has quickly become one of the world’s most valuable companies. The increase in stock price has made NVDA shareholders millions. It’s made many of their employees who hold NVDA Restricted Stock Units (RSUs) millionaires as well.
NVDA has been very generous with how it has granted its employees equity, so we decided to write an article dedicated to helping people understand how to manage their NVDA RSUs.
If you’re an employee at NVDA holding NVDA RSUs, you’ll want to understand:
Key Terms Related to Your NVDA RSUs
How NVDA RSUs are taxed
Whether or not you should sell NVDA RSUs at vest
What to do if you never sold NVDA RSUs
NVDA RSU Key terms
Before we dive into a more detailed discussion of managing NVDA RSUs, we need to go over at least a few terms related to RSUs. The following list includes RSU terms you’ll want to familiarize yourself with. (We cover all of these terms in greater detail in our RSU basics articles and RSU terms to know articles.)
Grant date - is the date on which you receive your grant of NVDA RSUs
Vesting Schedule - is the schedule for when NVDA RSUs will be released to you and officially become NVDA shares you own. NVDA offers a 4-year vesting schedule. Typically after one year 25% will vest, and then they’ll vest quarterly after that.
Vested/Unvested - is the breakdown of NVDA RSUs that have already been released and the NVDA RSUs that have yet to be released to you. If you quit with unvested RSUs, you will likely forfeit them all.
Vest Date - is the date on which your NVDA RSUs are released to you.
Ordinary Income - is the type of income that RSUs cause when they vest
Tax Withholding - as NVDA RSUs vest, NVDA will set aside a portion of the vested amount for taxes (more on this in the next section).
Now that we’ve covered a few basic RSU terms, let’s take a look at how they are taxed.
How NVDA RSUs are Taxed
NVDA RSUs are typically taxed at two points in time.
At vest
At sale
At vest, your RSUs are treated as wages and get taxed as ordinary income.
At sale, your RSUs are taxed as capital gains or treated as capital losses.
Since RSUs are taxed at vest, it doesn’t matter what the RSUs were worth back when they were first granted. All that matters is the value of your RSUs at vest.
This means that if you received 3,000 NVDA RSUs that vested at $110, you’d have taxable income of $330,000 on the day they vested. It doesn’t matter if the stock price rises or falls after that point, you will have some taxes due.
NVDA RSU Tax Withholding
Companies offering employees RSUs have a requirement to withhold from RSUs as they vest to ensure taxes are paid.
If you make less than $1M companies usually withhold 22%
If you make more than $1M, companies usually withhold 37%
This is extremely important if you have NVDA RSUs because if you make more than $150k-$200k, there is a really good chance that you’re not setting aside enough money for taxes as your NVDA RSUs vest.
For example, if you have $330k worth of RSUs vest, you’d have 22% withheld for taxes. Depending on your salary, your actual tax rate is probably 32% or 35%. This means that if you don’t prepare by withholding enough, you’re likely to be surprised by a $30k+ tax bill.
Adjust Tax Return for After Selling NVDA RSUs
Since we’re discussing how NVDA RSUs are taxed, we think it’s important to note that after you sell, you’ll want to make sure that your taxes are being done properly.
We’re emphasizing this point here because when RSUs vest and become fully taxable, you are supposed to have a cost basis that matches the amount that has become taxable. A common problem is that rather than showing the correct amount, brokerage firms holding your RSUs will often show a zero.
This means that if you aren’t careful when completing your tax return, you could easily end up paying taxes twice on RSUs. We won’t go into detail here, but it can cost you thousands of extra dollars if not done correctly, so we highly recommend ensuring that hasn’t happened.
Should You Sell NVDA RSUs or Shares?
This is the hardest question to answer because each individual has a different financial situation, different preferences, a different outlook, and different holdings of NVDA equity.
We know the answer “it depends” is unsatisfying, so we’ll share just a few bullet points to help inform your decision.
Evaluate your current financial situation objectively
Since NVDA RSUs have gone from being worth very little to being worth a whole lot, some of you may now find yourselves possessing enough generational wealth to last for the rest of your lifetime and maybe enough to sustain the lives of your children and grandchildren.
The first step towards determining what to do with your NVDA RSUs is to think about the financial goals you want to achieve.
Here are some questions to can ask yourself:
Do you have debts that you need to pay off?
Are you currently saving for anything in particular?
How much NVDA is already vested vs what are you expecting to receive?
How much NVDA equity is too much for you?
Do you have other investments?
Does NVDA make up the majority of your net worth?
How will you feel if you miss out on X dollar amount of gain?
How will you feel if NVDA drops by 50%?
This list may not cover all of the questions you have, but we hope it provides a good starting place as you evaluate whether or not you’d like to sell.
If you find yourself sitting on a couple million dollars or more, we’d suggest that you consult a professional to get their objective advice.
How much NVDA stock is too much?
This question is in our list above but is worth a quick discussion.
NVDA has grown so much that it now constitutes a large percentage of many of the funds that allow people to invest in the U.S. stock market. The Vanguard Total Stock Market ETF (VTI), which holds 3,000+ U.S. companies, has over 5% of the fund allocated to NVDA.
This means that if you work at NVDA you could have NVDA RSUs that have been granted, NVDA refresher grants of RSUs you’ll receive in the future, a very generous NVDA ESPP, your paycheck tied to NVDA, and a good chunk of shares from not having sold after vest.
We love NVDA, but at some point, it would be wise to consider diversifying. Even CEO Jensen Huang would probably advise you to take a little off the table considering that he sold 30 million dollars worth of his own shares recently.
NVDA RSU Selling Strategies
We understand that it may feel very weird (even counterintuitive) to sell NVDA RSUs or shares, but assuming that it is the best thing for you to do, let’s review a few simple selling strategies you can follow to take some of the emotion out of that decision.
Sell everything at vest
Selling all RSUs at vest is the most commonly recommended strategy for a several reasons: (1) It helps ensure you have enough money set aside for taxes, (2) you extract value from the company, (3) you have money to reinvest elsewhere or to use for personal goals, and (4) you still get to participate in the growth of the company through RSUs that haven’t vested yet.
The problem with this method of selling RSUs is that it’s not always possible to immediately sell at vest because employees are required to sell during open trading windows. So saying, “Sell everything at vest,” is actually saying, “Sell everything that vested as soon as you’re able to.”
Even though the company stock price may increase after you sell, reducing your exposure to risk is often the correct choice.
Sell 80% at vest
Selling the vast majority of RSUs at vest is the favorite strategy of many because it allows you to be mostly diversified, but still leaves you with enough investment that you feel like you’re participating in the growth of the company.
Even if you have RSUs that will be vesting, until they have vested they aren’t officially yours yet. This means that if you quit or get laid off, then anything unvested will be forfeited back to the company.
This probably isn’t much of a concern for NVDA employees at this point, but it is worth mentioning.
Sell half at vest
Selling half of your RSUs at vest is beneficial because it helps ensure that you will have enough for taxes and have cash to use towards other things. The downside is that as this strategy continues, you’re going to be very exposed to your company’s stock price performance.
That can be fine depending on your financial situation, but it’s probably worth the time and effort to run a few stress tests to evaluate how a large stock price drop would affect you and your ability to accomplish the financial goals you’ve set.
Set a net worth percentage of NVDA
A great selling strategy is to determine what percentage of your net worth you want NVDA to make up and then sell as NVDA RSUs vest to stay at or below that level.
There are lots of ways to go about using this method, but it’s a strategy you can use and adjust over time if you’re starting with a lot of NVDA and want to trim it.
Avoiding Taxes on NVDA Gains
What happens with a lot of people holding RSUs is that they let them vest and then never sell. (Probably because it’s much easier to do nothing!)
If you have intentionally or unintentionally held onto your vested NVDA RSUs, you’re likely sitting on a large pile of NVDA stock and there will be significant tax consequences if you sell.
Depending on the size of the gain, there are a few options at your disposal to save some money on taxes.
Donate your NVDA shares to a charitable organization
One of the easiest ways to avoid taxes is to donate money and/or stock to a qualified charitable organization. This can reduce taxes but ultimately means that money goes to charity instead of you - which means that you need to have some inclination toward charitable giving.
When you donate to a charitable organization you can choose to donate cash or stock and either will count as an itemized deduction on your tax return in the year you made the donation. If you have enough itemized deductions (over $14,600 for Single and $28,200 for Married), then your itemized deduction and charitable contributions will reduce your taxable income 1-to-1.
What’s great about donating NVDA shares directly to charity is that (1) you don’t have to sell the shares before donating, (2) you get a deduction equal to the full value of the contribution, and (3) the charity doesn’t have to pay taxes on the shares when they ultimately sell.
Create a Donor Advised Fund (DAF)
Along the same lines as donating NVDA shares directly to charity, you can set up what’s called a Donor Advised Fund (DAF).
A DAF is a charitable investment account where you can dictate both how it’s invested and what charities receive money from the account. Ultimately all the money must be used for charity, but there’s no set timeline.
You open the charitable account, contribute appreciated NVDA stock, receive a deduction, reallocate within the account, and distribute to charities of your choice over time.
We’ve covered DAFs and charitable contributions in detail in our Using a DAF to Pay Tithing article. Even if the tithing aspect doesn’t apply to you, everything else in the article will.
Establish a charitable remainder trust (CRT)
There are a few different versions of a CRT, but they all allow for the donor of stock to still receive a benefit rather than absolutely everything going to charity. To set one up you’ll need to work with an estate attorney as you can’t just open up these accounts online.
Here’s a summary of how a CRT works: You put stock into the CRT and receive a deduction for whatever you contribute. The stock within the CRT is then reinvested/diversified into other holdings.
The contribution must eventually go to charity, but for a set period of time, you’ll be able to pull income from the CRT. Here’s an illustration to help you visualize how they work.
So you’ll (1) receive a deduction in the year you contribute money to the CRT, (2) you'll receive income from the CRT for however long it’s designed to last, and (3) whatever is left (aka the remainder) goes to charity.
It’s a great vehicle for those who want to avoid taxes on NVDA RSUs that have appreciated significantly, but please keep in mind that it’s going to add some complexity both on the estate planning front and on the tax front. Implementing this type of strategy is really only something to consider if you’re looking to contribute $1M or more and have some charitable inclinations.
Contribute your NVDA shares to an Exchange Fund
The last way you can avoid taxes on NVDA RSUs is to contribute the shares that have appreciated into an exchange fund.
An exchange fund is a collection of highly appreciated stocks from a group of investors. Each investor takes their highly-appreciated stock, and contributes it to the fund. In return, each is given a slice of the fund.
We’ve covered Exchange Funds in detail in our when to use and exchange fund article. If you have $500k+ worth of NVDA gains, it's worth taking the time to read about them.
Final Thoughts on Managing NVDA RSUs
Managing NVDA RSUs is fun because there are so few companies that experience this kind of growth, but it’s also difficult for that same reason.
As account values get bigger, the impacts of your decisions get bigger.
It’s important to remember that it’s impossible to perfectly optimize how you manage NVDA RSUs, but you can make a plan based on what will work best for you and your individual situation and go from there.
NVDA has provided its employees with a unique opportunity to set themselves up for financial success. It’s up to these employees to learn how to manage their RSUs wisely and take advantage of the opportunity.
If you feel you need assistance with managing your NVDA RSUs, please reach out. Thanks for reading!