How RSU Taxation Works
Restricted Stock Units (RSUs) are a form of equity compensation where your employer promises to give you company shares in the future, typically after a vesting period (commonly 4 years with a 1-year cliff). Unlike stock options (ISOs and NSOs) which give you the right to purchase shares at a set price, RSUs are a direct grant of shares.
Quick Answer: When are RSUs taxed? RSUs are taxed as ordinary income at the moment they vest—when the shares transfer to your ownership. This is a taxable event regardless of whether you sell the shares.
The RSU Lifecycle
| Stage | What Happens | Tax Impact |
|---|---|---|
| Grant | Company promises future shares | No tax |
| Vest | Shares transfer to you | Ordinary income tax |
| Hold | You own the shares | No tax (unrealized gains) |
| Sell | You sell the shares | Capital gains tax |
The Golden Rule: Vesting = Taxable Event. You owe taxes even if you don't sell.
Calculating Your Tax at Vesting
Step-by-Step Calculation
- Determine shares vesting — Check your equity statement for the number of shares vesting on this date
- Find the fair market value (FMV) — The stock price at market close on vesting date
- Calculate taxable income — Shares × FMV = Taxable ordinary income (goes on your W-2)
- Apply your tax bracket — RSU income stacks on top of your salary
Example Calculation
| Component | Calculation | Amount |
|---|---|---|
| RSU Value | 500 shares × $150 | $75,000 |
| Federal Tax (32% bracket) | $75,000 × 32% | $24,000 |
| State Tax (CA, 9.3% effective) | $75,000 × 9.3% | $6,975 |
| Social Security (6.2%) | $75,000 × 6.2% | $4,650* |
| Medicare (1.45%) | $75,000 × 1.45% | $1,088 |
| Total Tax Liability | $36,713 |
*Social Security caps at $168,600 for 2024. If your salary exceeds this, no additional SS tax on RSUs.
Effective Tax Rate: ~49% for high earners in California (37% federal + 13.3% state - deductions)
The Withholding Problem
Quick Answer: Is the standard RSU withholding enough? Usually no. The default 22% federal withholding is for average earners. If you're in the 32-37% bracket, expect to owe additional taxes in April.
Standard Withholding Rates
| Tax Type | Rate | Notes |
|---|---|---|
| Federal | 22% | Up to $1M supplemental |
| Federal (high) | 37% | Over $1M supplemental |
| Social Security | 6.2% | Until $168,600 cap |
| Medicare | 1.45% | All income |
| Medicare (additional) | 0.9% | Over $200K (single) |
| State | Varies | Check your state |
What Should You Do?
| Your Situation | Recommendation | Why |
|---|---|---|
| RSUs < $50K and income < $200K | Standard withholding OK | 22% approximates your bracket |
| RSUs > $50K OR income > $200K | Increase W-4 withholding | Your marginal rate exceeds 22% |
| Large vest coming (IPO, cliff) | Make estimated payments | Avoid underpayment penalties |
| California/NYC high earner | Plan for 40-50% total | State taxes add significant burden |
Understanding Cost Basis
Your cost basis is crucial for calculating capital gains when you sell. Getting this wrong is one of the most common RSU mistakes.
Key Point: Your cost basis equals the fair market value (FMV) at vesting—the amount already taxed as ordinary income. You only pay capital gains on appreciation ABOVE this basis.
Cost Basis Example
| Event | Stock Price | Taxable Amount |
|---|---|---|
| Vest | $150/share | $150 × shares = Ordinary Income (W-2) |
| Sale | $200/share | ($200 - $150) × shares = Capital Gain |
The $0 Cost Basis Problem
Warning: Many brokers report RSU sales with a $0 cost basis on Form 1099-B. If you don't correct this, you'll pay tax on the entire sale price—double taxation!
How to Fix It
- Get your vesting statements — Find the FMV per share and vest date
- Calculate correct basis — Shares sold × FMV at vest = Your actual cost basis
- Report on Form 8949 — Use code 'B' to indicate basis is incorrect
- Adjust the basis column — Enter your calculated cost basis
Cost Basis Tracking Checklist
- ☐ Save all RSU vesting statements with FMV and dates
- ☐ Record shares remaining after sell-to-cover
- ☐ Note which tax lots vest on which dates
- ☐ Compare broker 1099-B basis with your records
- ☐ Correct $0 basis reporting on tax return
- ☐ Keep records for 7+ years after selling
Sell-to-Cover: How It Works
Most companies use sell-to-cover to handle RSU withholding:
| Step | What Happens | Example |
|---|---|---|
| 1 | RSUs vest | 100 shares at $150 = $15,000 |
| 2 | Calculate withholding | ~40% for taxes = $6,000 |
| 3 | Shares sold for taxes | 40 shares sold at $150 |
| 4 | Net shares to you | 60 shares deposited |
Key Point: The sold shares are a taxable sale, but typically at $0 gain (sold at same price as vesting FMV).
Capital Gains: Short vs. Long-Term
After vesting, your RSU shares follow standard capital gains rules:
| Attribute | Short-Term (under 1 year) | Long-Term (over 1 year) |
|---|---|---|
| Holding Period | Under 12 months after vest | Over 12 months after vest |
| Federal Tax Rate | 10-37% (ordinary income) | 0-20% |
| At $100K Income | 22-24% | 15% |
| At $500K Income | 35-37% | 20% |
| NIIT (3.8%) | If AGI > $200K | If AGI > $200K |
Recommendation: Hold for 12+ months after vesting for preferential long-term capital gains rates.
Common RSU Mistakes to Avoid
⚠️ Critical mistakes:
- Not planning for the withholding gap (22% vs. actual bracket)
- Using broker's $0 cost basis on tax return (double taxation!)
Other mistakes:
- Holding too much company stock (concentration risk)
- Selling immediately without considering holding period
- Not tracking separate tax lots for multi-vest situations
- Forgetting RSU income when estimating quarterly taxes
RSU Tax Planning Strategies
| Your Situation | Strategy | Why |
|---|---|---|
| Company stock >10% of net worth | Diversify after vesting | Concentration risk outweighs tax savings |
| Expecting stock appreciation | Hold for long-term gains | Convert future gains from 37% → 20% rate |
| High tax year, lower next year | Sell and rebuy after 30 days | Reset basis, recognize losses if available |
| Charitable intentions | Donate appreciated shares | Avoid capital gains + get FMV deduction |
Frequently Asked Questions
Can I defer RSU taxation like a 401(k)?
Generally no. RSUs create a taxable event at vesting that cannot be deferred. However, some companies offer Deferred Stock Units (DSUs) that allow deferral under Section 409A rules.
What happens if my company's stock drops after vesting?
You still owe tax on the vesting-day value. If the stock drops, you have a capital loss when you sell. This loss can offset other capital gains or up to $3,000 of ordinary income per year.
Are RSUs double-taxed?
No, but it can seem that way. Vesting creates ordinary income tax. When you sell, you only pay capital gains on appreciation above the vest price (your basis). The confusion comes from brokers reporting incorrect basis.
Do RSUs count toward 401(k) contribution limits?
RSU income counts toward total compensation for employer match eligibility, but doesn't affect your personal contribution limit ($23,000 in 2024).
Disclaimer: This guide is for educational purposes only and does not constitute tax, legal, or financial advice. Consult with a qualified tax professional for advice specific to your situation.
Last Updated: January 2026 | Author: VestingStrategy Research Team