RSUs are taxed twice: once when they vest, and again when you sell them

Restricted stock units (RSUs) trigger a tax bill the moment they vest—that is, the moment your employer says they are yours to keep. At that point, the IRS treats the value as ordinary income, and you owe income tax on it right away, even if you have not sold the shares yet. Then, when you eventually sell those shares, you owe a second tax on any gain or loss between the vesting price and the sale price. This two-step tax is the core thing to understand about RSUs.

Most people do not realize the first tax bill is coming. Your employer may withhold shares to cover it—meaning you receive fewer shares than you thought—or they may ask you to pay cash. Either way, you owe federal income tax, state income tax (in most states), and Social Security and Medicare tax on the vesting amount. The second tax, when you sell, is a capital gains tax and depends on how long you held the shares.

Key Takeaways

  • RSUs become taxable income the day they vest, at their fair market value on that date, regardless of whether you sell them.
  • Your employer typically withholds shares or cash to cover the income tax bill at vesting, so you may receive fewer shares than granted.
  • When you sell the shares later, you owe capital gains tax on the difference between the vesting price and the sale price.
  • If you hold shares for more than one year after vesting, the gain is taxed as long-term capital gains, which is usually a lower rate than short-term gains.
  • State income tax applies to RSUs in most states, and some states tax the vesting event differently than others.

What happens on the vesting date

The vesting date is when your RSU grant becomes real shares in your name. On that exact date, the IRS says you have received compensation equal to the share price multiplied by the number of shares vesting. If your company's stock is worth $100 per share and 100 shares vest, you have $10,000 of taxable income that year, even if you do nothing with the shares.

Your employer is required to withhold taxes on this amount. The withholding rate is usually 22 percent for federal income tax, though it can be higher if your total income is very high. On top of that, you owe Social Security tax (6.2 percent) and Medicare tax (1.45 percent) on the vesting amount. Your employer withholds these automatically, which means the number of shares you actually receive is reduced. If 100 shares vest at $100 each, you might receive only 75 or 80 shares after withholding, depending on your tax bracket and state.

Some employers allow you to choose how to cover the withholding—by selling shares, by having shares withheld, or by paying cash out of pocket. If you pay cash, you keep all the shares. This matters if you believe the stock price will rise and you want to hold as many shares as possible.

How capital gains tax works when you sell

Once you own the shares, they are treated like any other stock investment. When you sell them, you calculate the gain or loss: the sale price minus the vesting price (not the original grant price). If the stock was worth $100 when it vested and you sell it at $120, your gain is $20 per share. That gain is taxed as a capital gain.

The tax rate depends on how long you held the shares after vesting. If you sell within one year of the vesting date, the gain is short-term capital gains, taxed at your ordinary income tax rate—the same rate as your salary. If you hold for more than one year after vesting, the gain is long-term capital gains, which is taxed at a lower rate: 0 percent, 15 percent, or 20 percent depending on your total income that year.

The vesting date is what matters for the one-year clock, not the grant date. Many people mistakenly think they need to hold for one year from when they were granted the RSU, but the IRS only cares about the vesting date. If your RSU vests on January 15, 2024, and you sell on January 16, 2025, you may have access to for long-term capital gains treatment.

State income tax on RSUs

Most states tax RSUs as ordinary income on the vesting date, just as the federal government does. California, New York, Massachusetts, and Illinois all tax the full vesting amount in the year it vests. A few states—including Pennsylvania and Texas—do not have a state income tax at all, so you owe nothing to the state on the vesting event.

Some states have special rules. California, for example, taxes RSUs based on when they vest, not when you sell them, and it does not allow you to defer the tax. If you work in California but live in another state, you may owe California tax on the vesting amount even though you do not live there. This is a situation where you should consult a tax professional, because the rules are complex and depend on where you worked when the RSU vested.

When you sell the shares, state capital gains tax applies in most states. A few states—like New York and California—tax long-term capital gains at the same rate as ordinary income, while others have lower rates or no capital gains tax at all. This is another reason to check your specific state's rules.

The difference between vesting and selling

The most common mistake is treating the vesting date and the sale date as the same tax event. They are not. Vesting is when you owe income tax on the full value of the shares. Selling is when you owe capital gains tax on the change in value since vesting.

If you receive an RSU grant of 100 shares at a $100 grant price, and the stock is worth $100 when it vests, you owe income tax on $10,000. If you then hold the shares and sell them a year later at $150, you owe capital gains tax on the $50 gain (100 shares × $50 per share). The original $100 grant price is irrelevant for tax purposes; only the vesting price matters.

This also means you can owe taxes even if the stock price falls. If 100 shares vest at $100 (you owe income tax on $10,000) and you sell them at $80, you still owed that income tax at vesting. You also have a capital loss of $20 per share, which you can use to offset other capital gains or, in some cases, ordinary income. But the income tax bill at vesting does not go away.

Planning ahead to reduce your tax bill

You cannot avoid the income tax at vesting—it is mandatory. But you can plan around the capital gains tax by deciding when to sell. If you believe the stock will rise, holding for more than one year after vesting locks in the long-term capital gains rate, which is usually lower than short-term rates. If you believe the stock will fall, selling sooner may limit your loss, though you will owe short-term capital gains tax on any gain.

Some people use RSUs as part of a broader tax strategy. For example, if you have a large capital loss from another investment, you might sell RSU shares at a gain to offset that loss. Or, if you expect your income to be lower in a future year, you might hold the shares and sell them in that lower-income year to pay capital gains tax at a lower rate.

Another consideration is diversification. Because RSUs are compensation from your employer, holding them concentrates your wealth in a single company. Many financial advisors recommend selling at least some shares when they vest to diversify into other investments, even though you will owe short-term capital gains tax. This is a personal decision that depends on your risk tolerance and financial situation.

How to track your RSU taxes

Your employer should provide a Form 3921 or similar documentation showing the vesting date, the number of shares, and the fair market value on the vesting date. Keep this document for your records. When you sell the shares, your brokerage will send you a Form 1099-B showing the sale price and date. Use both documents to calculate your capital gain or loss.

If your employer withheld shares to cover taxes, that withholding is reported on your W-2 as wages. The amount withheld reduces your taxable income from the RSU vesting, so you do not pay tax twice on the withheld amount. When you file your tax return, you report the vesting amount as income and the capital gain or loss separately.

If you sold shares at a loss, you can deduct up to $3,000 of capital losses against ordinary income in a single year. Any losses above that can be carried forward to future years. Keep detailed records of every vesting and sale so you can calculate your basis correctly.

Frequently Asked Questions

Do I owe taxes on RSUs if I do not sell them?

Yes. You owe income tax on the vesting date based on the stock price that day, even if you never sell the shares. The tax is due in the year the RSU vests, not when you sell. If you hold the shares and the price rises, you will owe additional capital gains tax when you eventually sell.

What if my company stock drops in value after it vests?

You still owe the income tax on the vesting amount. However, if you sell the shares at a loss, you can claim a capital loss on your tax return. For example, if 100 shares vest at $100 (you owe income tax on $10,000) and you sell at $80, you have a $2,000 capital loss that can offset other gains or up to $3,000 of ordinary income.

How do I know if my gain is short-term or long-term capital gains?

Count forward one year from the vesting date. If you sell after that date, it is long-term. If you sell before that date, it is short-term. The grant date does not matter—only the vesting date. Long-term capital gains are usually taxed at 0, 15, or 20 percent depending on your income, while short-term gains are taxed at your ordinary income tax rate.

Can I avoid the tax by not selling the shares?

No. The income tax is due on the vesting date regardless of whether you sell. You cannot defer it by holding the shares. However, you can defer the capital gains tax by not selling, which means you only owe the income tax until you decide to sell.

What if I work in one state but live in another?

You may owe tax to both states. Generally, you owe tax to the state where you worked when the RSU vested. Some states have reciprocal agreements that prevent double taxation, but others do not. If you are in this situation, consult a tax professional or contact your state's tax authority for guidance.