RSUs are taxed at two points. When they vest, the fair market value of the shares is treated as ordinary income and added to your W-2. You owe federal income tax, state income tax, and payroll taxes on that amount. When you later sell the shares, any gain above the vesting price is a capital gain. Hold for more than one year after vesting and gains qualify for lower long-term capital gains rates. Sell within a year and gains are taxed as ordinary income.

How RSUs are taxed (and what to do when they vest)

Apr 27

Written By Max Novak

By Novak Financial Partners · Updated April 2026

Key takeaways

RSUs are taxed as ordinary income when they vest, not when they are granted
Most companies withhold only 22% for federal taxes. If you are in a higher bracket, you will owe the difference at tax time
When you sell, any gain above the vesting price is taxed as a capital gain
Hold more than one year after vesting to qualify for lower long-term capital gains rates
Your cost basis is the stock price on the vesting date, not the grant date
If any single stock represents more than 10% to 20% of your portfolio, it is worth having a plan to manage that concentration

RSUs are one of the most common forms of equity compensation. They are also one of the most frequently misunderstood at tax time. The mechanics are not complicated, but there are a few places where getting it wrong is expensive.

This article covers how RSUs are taxed, what to think about when deciding whether to sell or hold, and a few strategies worth knowing for high-vesting years.

What are RSUs?

A Restricted Stock Unit is your company's promise to give you actual shares of stock once you meet certain conditions. Usually that condition is staying employed for a set period of time. Until then, you do not own the shares. The stock is restricted.

When the conditions are met, the RSUs vest. At that point, real shares land in your brokerage account. No purchase required. That is the main difference between RSUs and stock options, which require you to buy shares at a set price. RSUs are worth something as long as the stock price is above zero.

Common vesting schedules

Graded vesting: Shares unlock gradually over time. The most common schedule is 25% per year over four years. A grant of 1,000 shares vests 250 shares per year.

Cliff vesting: All shares vest at once after a set period, often one year. Common for initial grants at new companies.

Performance-based vesting: Shares vest when the company or individual hits specific targets. More common at later-stage companies and in senior roles.

How RSUs are taxed: two events, two tax rates

RSUs trigger taxes at two separate points. Understanding this timeline is where most of the planning happens.

Tax event 1: when shares vest. The fair market value of your shares on the vesting date is treated as ordinary income. It gets added to your W-2, the same as your salary. You owe federal income tax, state income tax, and payroll taxes on that amount. Payroll taxes include Social Security (6.2% up to the annual wage base, which is $184,500 in 2026) and Medicare (1.45%, plus an additional 0.9% once your total compensation exceeds $200,000 single or $250,000 married). One important note for high earners: if your regular salary already exceeds the $184,500 Social Security wage base before your RSUs vest, no additional Social Security tax is withheld on the equity income. This happens whether you sell the shares or not.

Tax event 2: when you sell. After vesting, your cost basis is the stock price on the vesting date. Any gain above that price is a capital gain. Hold for more than one year after vesting and it qualifies for long-term capital gains rates (0%, 15%, or 20% depending on your income). Sell within one year and gains are taxed as ordinary income.

Example: 500 RSUs vest at $120 per share

$60,000 is added to your W-2 as ordinary income at vesting. If you are in the 35% federal bracket plus a 9% state rate, you owe roughly $26,400 in taxes on the vesting event alone.

If you hold the shares and sell 18 months later at $150, you have a $30 per share gain ($150 minus $120 cost basis). On 500 shares that is a $15,000 long-term capital gain, taxed at 15% or 20% depending on your income.

If the stock drops to $90 after vesting and you sell, you have a $15,000 capital loss. You still owed ordinary income tax on the $60,000 at vesting. The loss does not erase that bill.

Hypothetical illustration only. Tax rates and outcomes will vary based on individual circumstances. Consult a qualified tax professional before making decisions.

The 22% withholding gap

When RSUs vest, your employer withholds taxes automatically, usually by selling a portion of your shares to cover the bill. This is called "sell to cover." You will see it on your brokerage statement when shares vest. The employer sells enough shares to fund the withholding, and the remaining net shares are deposited into your account. You are still taxed on the full vesting value, not just the shares you keep.

Most companies use the IRS supplemental wage withholding rate of 22% for federal taxes. That is the default. For many high earners, it is not enough. The rate jumps to 37% only if your total supplemental wages exceed $1 million in a year. For everyone below that threshold, 22% is what gets withheld regardless of your actual bracket.

What the gap looks like in practice

If you earn $250,000 as an Account Executive and vest $80,000 in RSUs, your marginal federal rate is likely 32% to 35%, plus state taxes. Your company withholds 22%. That leaves a 10% to 13% gap on $80,000, which is $8,000 to $10,400 owed at tax time. Without a plan, this shows up as a surprise every April.

If you are married and your spouse also earns income, it is worth reviewing your W-4 withholding together. Combined household income can push you into a higher bracket than either person would reach alone, which makes the withholding gap on RSU income larger than it appears at first.

Three ways to address it:

1Set aside 10% to 15% of your RSU value in cash every time shares vest
2Increase your regular W-4 withholding to make up the difference over the year
3Make quarterly estimated tax payments if RSUs make up a large portion of your income

Sell at vest or hold? How to think about it

Once shares vest, this is no longer a compensation question. It is an investment question. A useful way to frame it: if you received the same dollar amount in cash today, would you choose to put all of it into your company's stock? If the answer is no, that tells you something about how much of the position you want to hold.

Case for selling at vest

No capital gains tax since cost basis equals sale price
Eliminates single-stock concentration risk immediately
Frees capital to redeploy into a diversified portfolio
Simplifies taxes significantly

Case for holding past vest

Future gains taxed at lower long-term rates after one year
Potential upside if you have conviction on the company
Can pair with tax-loss harvesting in other accounts
Allows spreading sales across tax years to manage brackets

There is no universal right answer. The decision depends on your total financial picture, how much company stock you already hold, and your tax situation in a given year. What matters most is having a plan before vesting, not making the decision in the moment.

Concentration risk: the problem that builds gradually

Most people do not start out overconcentrated. They get there gradually. A few vesting events, a stock that has been performing well, a reluctance to sell what is going up. Before long, one company represents a large share of their total net worth.

The consideration is not just financial exposure. Your paycheck and your investments are both tied to the same company. If it runs into trouble, compensation and portfolio value can decline at the same time. That is a compounding of risk that does not exist in a diversified portfolio.

A common rule of thumb: if any single stock, including your employer, represents more than 10% to 20% of your total investment portfolio, it is worth having a systematic plan to manage that position over time. This does not mean selling everything at once. It means having a strategy rather than making reactive decisions each time shares vest.

Four tax strategies worth knowing

Maximize your 401(k) in high-vesting years. RSU income pushes your total income higher, which can push you into a higher bracket. Contributing the maximum to your 401(k) in years with large vesting events reduces your taxable income dollar for dollar. If your employer plan allows it, the mega backdoor Roth is worth exploring too.

Tax-loss harvesting. If you have underperforming investments elsewhere in your portfolio, selling them in the same year as a large RSU event can offset capital gains and reduce your overall tax bill. This takes coordination across accounts, but it can be meaningful on larger vesting events.

Donate appreciated shares. If you hold RSU shares that have appreciated since vesting, donating them directly to charity instead of cash lets you avoid capital gains tax entirely and still take the charitable deduction for the full market value. A donor-advised fund makes this straightforward to set up and flexible to distribute over time.

Spread sales across tax years. Selling across December and January puts income in two different tax years. This can help keep you below a bracket threshold or reduce net investment income tax (NIIT) exposure, which applies at $200,000 single and $250,000 married.

Cost basis: the detail that trips people up

Your cost basis for RSU shares is the fair market value of the stock on the vesting date. That amount was already taxed as ordinary income on your W-2. When you sell, you only owe capital gains tax on appreciation above that price.

The problem: some brokers report a $0 cost basis on Form 1099-B for RSU shares. If you file using that figure, you will pay tax a second time on the vesting value you already paid ordinary income tax on. Always confirm your broker has the correct basis before filing. If the 1099-B shows $0 or an incorrect amount, you can correct it on your return using the vesting price from your pay stub or equity statement.

Frequently asked questions

How are RSUs taxed?

RSUs are taxed at two points. At vesting, the fair market value of shares is ordinary income added to your W-2. At sale, any gain above the vesting price is a capital gain. Hold more than one year after vesting for long-term rates. Sell within one year and gains are taxed as ordinary income.

Why do I owe extra taxes on RSUs when I file?

Your employer likely withheld only 22% in federal taxes at vesting, but your actual marginal rate is higher. If you are in the 32% to 37% bracket, the gap is 10 to 15 percentage points. On a $100,000 vesting event that is $10,000 to $15,000 you still owe. Setting aside cash at each vesting event or adjusting your W-4 are the most common ways to address it.

Should I sell RSUs immediately when they vest?

Selling at vest eliminates capital gains tax and reduces concentration risk. Holding for more than one year after vesting qualifies future gains for lower long-term rates, but that benefit has to be weighed against single-stock risk. The right answer depends on your total financial picture, how much company stock you already hold, and your tax situation. Having a plan before vesting is more important than the specific decision.

What is my cost basis for RSU shares?

The fair market value of the shares on the vesting date. That amount was already taxed as ordinary income. When you sell, you only owe capital gains on appreciation above that price. If your broker shows a $0 cost basis on Form 1099-B, correct it before filing or you will be taxed twice on the vesting value.

Can I reduce taxes on RSUs?

You cannot avoid ordinary income tax at vesting. But you can reduce the overall impact. Maximizing your 401(k) in high-vesting years reduces taxable income. Tax-loss harvesting offsets capital gains. Donating appreciated shares avoids capital gains entirely. Spreading large sales across tax years manages bracket exposure.

What happens to unvested RSUs if I leave my job?

Unvested RSUs are almost always forfeited when you leave. Vested shares that have already converted are yours to keep. Some companies offer accelerated vesting on termination or acquisition, but this depends on your equity agreement. Always review the terms before leaving, especially if a large grant is approaching its vest date.

How do RSUs affect my ability to contribute to a Roth IRA?

RSU income counts toward your modified adjusted gross income. If a large vesting event pushes your income above the Roth IRA phaseout thresholds ($153,000 single and $242,000 married filing jointly in 2026), you cannot contribute directly. The backdoor Roth IRA is the workaround. If your employer plan supports it, the mega backdoor Roth lets you contribute up to $47,500 more into Roth accounts annually through your 401(k).

What is concentration risk and why does it matter for RSUs?

Concentration risk is the danger of having too much of your net worth tied to a single stock. With RSUs, this builds gradually across vesting events. If your company stock represents more than 10% to 20% of your total portfolio, your compensation and savings can both decline at the same time if the company struggles. A systematic selling plan helps manage this over time.

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This article is for educational and informational purposes only and does not constitute personalized investment, tax, or financial planning advice. Hypothetical illustrations are for illustrative purposes only, do not reflect the results of any actual client account, and are not a guarantee of future results. Individual outcomes will vary based on income, tax rates, investment returns, and other circumstances. Tax rules and rates are subject to change. Consult a qualified financial, tax, or legal professional before implementing any strategy. Advisory services are offered through Core Planning LLC, a Registered Investment Advisor. For additional disclosures please visit corepln.com/disclosures.

Max Novak