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, even if you never sell them. Your employer withholds income tax and payroll taxes on the fair market value of the shares on the vesting date. Then, if you later sell those shares for more than they were worth when they vested, you owe capital gains tax on the profit. If the stock drops in value before you sell, you cannot deduct the loss on your personal return.

The vesting date is what matters for the first tax hit, not the grant date or the sale date. If 100 RSUs vest on a day when the stock trades at $50 per share, you owe income tax on $5,000 of compensation that year, regardless of whether you hold or sell the shares when ready after.

Key Takeaways

  • RSUs are taxed as ordinary income on the vesting date at the stock's fair market value, and your employer withholds the tax automatically.
  • You owe a second tax—capital gains tax—only if you sell the shares for more than they were worth on the vesting date.
  • The tax withholding your employer takes may not cover your full tax bill if the stock price rises significantly before you sell.
  • If you sell within one year of vesting, any gain is taxed as short-term capital gains at your ordinary income tax rate; after one year, it qualifies for the lower long-term rate.
  • You cannot claim a loss on RSUs that drop in value after vesting, even if you sell them at a steep discount.

How the vesting-date tax works

When RSUs vest, your employer treats the vesting as a taxable event and calculates the fair market value of the shares on that specific date. That value becomes your ordinary income for the year. Your employer withholds federal income tax, Social Security tax (6.2 percent up to the annual wage cap), Medicare tax (1.45 percent), and any state or local income tax owed.

The withholding happens automatically through payroll. Your employer may withhold shares to cover the tax bill—so if 100 RSUs vest and the withholding is 40 percent, you receive 60 shares and your employer sells 40 to pay the tax. Alternatively, some employers let you pay the withholding in cash. Either way, the vesting date value is locked in for income tax purposes, and you report it on your W-2 as wages.

This tax is unavoidable. You cannot defer it by holding the shares or selling them later. The moment the vesting condition is met, the income tax is due that year.

Capital gains tax when you sell

After vesting, the shares are yours to keep or sell. If you sell them for more than the vesting-date value, the difference is a capital gain. If you sell for less, you have a capital loss—but you cannot deduct it on your personal tax return. (Capital losses can offset capital gains, but not ordinary income, with limited exceptions.)

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

For example: RSUs vest at $50 per share. You sell at $70 per share nine months later. The $20 gain per share is short-term capital gains, taxed at your ordinary rate. If you sell at $70 per share 14 months after vesting, the $20 gain is long-term capital gains, taxed at the preferential rate.

Why your withholding may not be enough

Your employer withholds tax based on the vesting-date value, not the sale price. If the stock rises sharply before you sell, the withholding will be too low, and you will owe additional tax when you file your return. If the stock drops, you may have overpaid, and you can claim a refund.

This mismatch is common with volatile stocks. A tech company employee whose RSUs vest at $100 per share may see the stock climb to $150 by the time they sell. The employer withheld tax on $100 of income, but the employee now owes capital gains tax on the $50 gain—on top of the original income tax. The employee must pay this additional tax at filing time.

To avoid a surprise bill, estimate your capital gains tax liability before you sell. If the stock has risen significantly, set aside money to cover the additional tax owed.

How RSU taxation differs from stock options

RSUs and stock options are both forms of equity compensation, but they are taxed differently. With RSUs, you owe income tax on the vesting date, with no choice in the matter. With non-may have access to stock options (NSOs), you owe income tax only when you exercise the option and buy the shares; the tax is based on the difference between the exercise price and the fair market value on the exercise date. With incentive stock options (ISOs), you may owe no tax when you exercise, though you could trigger the alternative minimum tax (AMT).

RSUs are simpler in one sense: there is no exercise decision. The shares are granted and vest on a schedule. But the automatic tax bill on vesting can be a surprise if you were not expecting it.

Tax withholding and net shares received

When RSUs vest, your employer must withhold taxes. The most common approach is net share settlement: your employer sells enough shares to cover the withholding and gives you the rest. If 100 RSUs vest at $50 per share and the withholding is $2,000 (40 percent), your employer sells 40 shares for $2,000 and gives you 60 shares.

Some employers offer a cash withholding option, where you pay the tax in cash and keep all the shares. This is useful if you want to hold the full number of shares or if you expect the stock to rise. However, cash withholding requires you to have the money available on the vesting date.

A few employers allow sell-to-cover arrangements, where you can instruct them to sell shares on your behalf to cover withholding. The mechanics are similar to net share settlement but give you more control over the timing.

State and local taxes on RSUs

In addition to federal tax, you owe state and local income tax on the vesting-date value of RSUs if you live in a state or city that has income tax. Some states, like California, tax RSUs at the full ordinary income rate. Others, like Texas and Florida, have no state income tax.

If you live in one state when the RSUs vest but move to another state before you sell, the tax treatment can become complicated. Generally, you owe tax to the state where you lived when the RSUs vested. If you move to a state with no income tax after vesting, you do not owe that new state's tax on the RSUs, but you may owe tax to your former state. Consult a tax professional if you are relocating.

Frequently Asked Questions

Do I owe tax if I never sell the shares?

Yes. You owe income tax on the vesting date, even if you hold the shares forever and never sell them. The tax is based on the fair market value when they vest, not on whether you actually sell. If you eventually sell at a loss, you cannot deduct that loss.

What if my company stock drops after vesting?

You still owe the income tax on the vesting-date value. You cannot reduce that tax bill. If you sell the shares for less than the vesting value, you have a capital loss, but you cannot deduct it against ordinary income. You can use it to offset other capital gains.

How do I report RSU income on my tax return?

Your employer reports the vesting-date value on your W-2 as wages. You do not file a separate form. When you sell the shares, you report the capital gain or loss on Schedule D (Form 1040). Your brokerage will send you a Form 1099-B showing the sale proceeds.

Can I defer the tax on RSUs?

No. The tax is due in the year the RSUs vest. You cannot choose to pay it later or spread it over multiple years. Some employers offer a Section 83(b) election, which lets you pay tax on the grant date instead of the vesting date, but this is rare and usually not advantageous.

What is the difference between short-term and long-term capital gains tax?

Short-term gains (sold within one year of vesting) are taxed at your ordinary income tax rate, which can be as high as 37 percent. Long-term gains (sold after one year) are taxed at preferential rates: 0, 15, or 20 percent, depending on your total income. Long-term rates are almost always lower, so holding for over a year usually saves money.