For many U.S. taxpayers, relocating abroad doesn’t just involve new time zones and currencies – it also introduces complex tax considerations, especially when it comes to equity compensation like Non-Qualified Stock Options (NSOs) and Restricted Stock Units (RSUs).
If you’ve been granted equity while working in the U.S. and are now planning to move overseas (or already have), it’s essential to understand how timing impacts taxation. This article will walk you through how the IRS treats NSOs and RSUs granted before your international move, and why it’s so important to plan carefully during this transition.
Why Grant Timing Matters
The key factor in determining U.S. tax treatment is not where you live when your NSOs or RSUs were granted, but rather when they vest (RSUs) or are exercised (NSOs), and eventually sold. Equity compensation is generally taxed at the point it is either received (for RSUs) or exercised/sold (for NSOs), regardless of when it was granted.
That means if you move abroad before your RSUs vest or before you exercise NSOs, you’re potentially subject to a complicated mix of U.S. and foreign tax obligations.
Taxation of NSOs After Moving Abroad
With NSOs, tax is typically due at the time of exercise:
- Ordinary income tax on the difference between the exercise price and fair market value at the time of exercise (the “spread”)
- Capital gains tax on any appreciation between the date of exercise and the date of sale
U.S. tax implications: If you’re a U.S. citizen or green card holder, the U.S. will tax the spread as ordinary income, regardless of your country of residence. NSO income cannot be excluded under the Foreign Earned Income Exclusion (FEIE).
Foreign tax implications: Many countries will also seek to tax the spread based on the portion of work performed in their jurisdiction during the grant-to-vest period. This creates potential double taxation, though you may be able to mitigate it using the Foreign Tax Credit (FTC) or an applicable tax treaty.
Taxation of RSUs After Moving Abroad
RSUs are taxed as ordinary income when they vest, based on the fair market value of the shares at that time.
U.S. tax implications: RSU income is taxed when the shares vest. As with NSOs, the FEIE doesn’t apply to this type of income.
Foreign tax implications: The foreign country may also tax RSU income, especially if you were working there during the vesting period. Tax sourcing rules vary, but many countries allocate income across the vesting schedule.
Case Study: Emily Moves to Germany
Emily, a U.S. citizen, received NSOs and RSUs in 2021 while working in California. She relocated to Germany in January 2023. Her RSUs vested in April 2023, and she exercised her NSOs in May 2023.
- RSUs: The U.S. taxes the full fair market value of the vested shares in 2023. Germany also taxes the income because the vesting occurred while Emily was a tax resident. She must explore whether the U.S.–Germany tax treaty or FTC can provide relief.
- NSOs: The spread at exercise is taxed as ordinary income by the U.S. Germany may also impose tax on part of the income based on where Emily worked between grant and vesting.
Key Considerations and Tips
Track key dates (grant, vest, exercise, sale): they determine how income is sourced and taxed.
Review tax treaties: not all treaties cover equity compensation or provide relief for double taxation.
Understand FEIE limits: deferred compensation like NSOs/RSUs generally can’t be excluded.
Prepare for dual reporting: you may have to file and pay taxes in both the U.S. and your new country of residence.
Plan your moves and exercises strategically: timing matters and can significantly alter the tax outcome.
Final Thoughts
Equity compensation is a valuable benefit, but if you’re moving abroad, it adds a layer of complexity. Understanding how NSOs and RSUs are taxed when granted before moving can help you avoid pitfalls and better coordinate your international tax planning.
The information in this blog post is for general informational purposes only and does not constitute professional tax advice. We strongly recommend consulting a qualified tax professional before making any decisions. US Expat Tax Advisor is not liable for any actions taken based on this content.
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