How RSUs Are Taxed
Updated ·6 min read·Reviewed by the StockTools.ai Research Team
- ▸RSUs are taxed as ordinary income on the vest date, at the full market value of the shares, whether or not you sell.
- ▸Employers usually withhold at the 22% flat supplemental rate, so anyone in the 32%, 35% or 37% bracket is underwithheld and owes the difference in April.
- ▸Your cost basis is the price on the vest date, but Form 1099-B often reports it as zero, and accepting that number means paying tax twice on the same money.
- ▸The 83(b) election does not apply to RSUs. It applies to restricted stock awards, which are a different instrument that people constantly confuse with RSUs.
- ▸Holding vested shares is a decision to buy your employer’s stock at that day’s price, and the tax saving on the appreciation is usually smaller than the concentration risk.
Vesting is a paycheck, not a purchase
The day an RSU vests, the market value of those shares lands on your W-2 as ordinary income, exactly like salary. You did not buy anything, you did not sell anything, and it makes no difference whether you intend to hold the stock for a decade. The IRS treats delivery of the shares as compensation paid, and taxes it in that year at your ordinary rate.
Run the numbers on a typical grant. You have 1,600 RSUs vesting over four years, 400 per year, and on the vest date the stock trades at $60. That vest event adds 400 × $60 = $24,000 of ordinary income to your W-2. Social Security and Medicare come out of it too. If the stock is at $12 nine months later, none of that changes: you were taxed on $24,000 of income you may no longer have, because the tax attached at vest.
This is the single most important structural fact about RSUs, and it is what makes them different from options. An option gives you a decision. An RSU gives you a tax bill with a delivery attached. The only real choice you get is what to do with the shares afterward.
The 22% withholding trap
RSU income is supplemental wages, and the default federal withholding on supplemental wages is a flat 22% up to $1 million in a year, then 37% above that. Payroll systems apply the 22% mechanically. They do not know or care what bracket you actually land in.
For a high earner that gap is real money. Take the $24,000 vest above, in a household whose marginal federal rate is 35%. Withheld at 22%, that is $5,280 sent to the IRS. The tax actually owed on that income is closer to $8,400. The $3,120 shortfall does not announce itself anywhere: your paystub looks correct, your shares arrive, and the bill turns up when you file. Multiply it by four vests a year and by state tax, and people discover five figures of unexpected liability in April.
Two ways companies handle the mechanics. Net share settlement means the company keeps enough shares to cover the withholding and delivers the rest, so 400 vested shares might arrive as 288. Sell-to-cover means all 400 are delivered and the broker immediately sells enough to raise the cash. Either way the withholding rate is still the flat supplemental rate, so the shortfall is identical. Some payroll systems let you elect a higher withholding percentage; if yours does not, quarterly estimated payments or extra withholding on your regular salary are the usual fixes.
The cost-basis double-tax, and how to catch it
Your cost basis in vested RSU shares is the fair market value used to tax you at vest. In the example, $60 per share. Sell at $60 the same day and your capital gain is roughly zero, because you already paid ordinary income tax on the entire $60.
The problem is what your broker reports. For shares acquired through equity compensation, the basis on Form 1099-B commonly shows what you paid out of pocket, which for RSUs is nothing. So the form says $0 basis, and if you or your software transcribes it, you report a $24,000 capital gain on a sale that produced no gain at all. You already paid ordinary tax on that $24,000. Now you pay capital gains tax on it too.
The fix is a correction, not a fight: the sale gets reported on Form 8949 with the basis adjusted up to the real figure, backed by the supplemental statement your broker issues alongside the 1099-B. That supplemental statement is the document worth hunting down every year, because it carries the adjusted basis the 1099-B leaves off. This is the most common and most expensive RSU filing error, and it is entirely preventable by comparing the two documents before filing.
What happens after vest
From the vest date forward you own ordinary shares with an ordinary cost basis, and normal capital gains rules take over. Sell within a year of vesting and any move above the vest price is a short-term gain, taxed at ordinary rates. Hold more than a year from the vest date and it is long-term, at 0%, 15% or 20% depending on income. The holding clock starts at vest, not at grant.
Note what the favorable rate applies to: only the appreciation after vest. On the $60 vest, if you hold 18 months and sell at $75, the $60 was already taxed as income and only the $15 per share difference gets long-term treatment. On 400 shares that is $6,000 of gain, and at a 35% ordinary rate against a 15% long-term rate the difference is exactly $1,200. That is the actual size of the tax incentive to hold.
Set against that $1,000: the shares are in the same company that pays your salary. If it has a bad year, your compensation, your job security and this position all move together. The clarifying question is the one a financial planner will ask you: if the same money appeared in your account as cash, would you buy this stock with it today? Where the answer is no, holding for the tax treatment is a decision to keep an investment you would not make, in exchange for a discount on part of the gain.
RSAs, 83(b), and double-trigger vesting
The 83(b) election gets recommended constantly in equity-compensation threads, and it does not apply to RSUs. An 83(b) election lets you pay tax now on the value of restricted property at grant, so that all later appreciation is capital gain. RSUs are not property at grant; they are an unfunded promise to deliver shares later, which is exactly why there is nothing to make the election against.
Restricted stock awards are the instrument 83(b) does apply to. With an RSA you receive actual shares up front, subject to forfeiture, and you can elect within 30 days of grant to be taxed on their value at that moment. At an early-stage company where shares are worth almost nothing, that can convert a large future gain into capital gains at trivial cost. The risk is symmetrical: pay the tax, leave before vesting, and you generally do not get it back. Read your grant documents to establish which instrument you actually hold before acting on advice written for the other one.
One more wrinkle, at private companies. Double-trigger RSUs require both a time-based vest and a liquidity event such as an IPO or acquisition. Nothing is taxed while only the first trigger has been met. When the second one fires, every previously vested tranche becomes taxable at once, which is why newly public employees can face an enormous single-year tax bill immediately followed by a lockup that prevents selling.
FAQ
Do I owe tax on RSUs if I never sell the shares?
Yes. The tax attaches at vest, based on the market value that day, and selling has nothing to do with it. This is why people can owe tax on stock that later falls sharply in value.
Why do I owe money in April when my company already withheld?
Because the withholding is usually a flat 22% supplemental rate rather than your actual marginal rate. If you are in the 32% to 37% range, roughly 10 to 15 cents of every dollar of RSU income went unwithheld, plus any state tax.
My 1099-B says my cost basis is zero. Is that right?
Almost certainly not. Your basis is the market value on the vest date, which was already taxed as W-2 income. Brokers frequently report the out-of-pocket cost instead, which is zero. The sale gets reported with an adjusted basis on Form 8949, using the supplemental statement as support.
Should I sell RSUs immediately at vest?
That is a personal financial decision rather than a tax one, because selling at vest produces almost no additional tax. Selling immediately converts compensation to cash and removes single-stock concentration; holding is a decision to invest in your employer at that price. Neither answer is universal, and a fee-only advisor is the right person to run it against your full situation.
Can I file an 83(b) election on my RSUs?
No. The 83(b) election applies to restricted stock awards, where shares are transferred at grant. RSUs are a contractual promise to deliver shares later, so there is nothing to elect against. Confirm which instrument your grant documents describe.
How long do I have to hold RSU shares for long-term capital gains?
More than one year from the vest date, not the grant date. The favorable rate applies only to appreciation above the vest-date price, since the vest-date value was already taxed as ordinary income.
Put it to work
Sources & further reading
- ▸ IRS Publication 525, Taxable and Nontaxable Income
- ▸ IRS Publication 15 (Circular E), supplemental wage withholding
- ▸ IRS Form 8949 instructions, basis adjustments
- ▸ IRC Section 83, property transferred for services
More to learn
Educational only — not financial advice. Concepts simplified for clarity; markets are messier than definitions.