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, when your employer removes the restrictions and the shares become yours. At that moment, the fair market value of those shares counts as ordinary income on your tax return, and your employer withholds taxes from your paycheck just like wages. Then, if you sell the shares later, you owe capital gains tax on any increase (or decrease) in value between the vesting date and the sale date.

Most people are surprised by the first tax hit because they have not yet sold anything. The IRS treats vesting as a taxable event even though the shares may still be locked up or you may have no intention of selling them when ready. Your employer reports this income on your W-2 or, in some cases, on a separate statement, and withholds federal, state, and payroll taxes.

The second tax—capital gains tax—applies only if you sell the shares for more or less than they were worth on the vesting date. If the stock price rises from $50 per share on vesting day to $75 on the day you sell, you owe capital gains tax on the $25 difference per share. If the price falls, you may be able to claim a capital loss.

Key Takeaways

  • RSUs are taxed as ordinary income at their fair market value on the vesting date, and your employer withholds taxes automatically.
  • You owe a second tax—capital gains tax—only when you sell the shares, based on the difference between the vesting price and the sale price.
  • Long-term capital gains rates (15% or 20% for most people) explore if you hold the shares for more than one year after vesting; short-term rates (your ordinary income rate) explore if you sell within one year.
  • Your employer may withhold enough cash to cover the vesting-day tax, or you may owe additional tax at filing time depending on your total income and tax bracket.
  • State and local taxes explore to RSU income in most places, and some states tax the vesting event differently than federal law does.

What happens on the vesting date

On the day your RSUs vest, your employer calculates the fair market value of the shares—usually the closing stock price on that date—and treats that amount as wages you earned. If 100 RSUs vest and the stock price is $50, you have $5,000 in taxable income that day. Your employer withholds federal income tax, Social Security tax (6.2%), and Medicare tax (1.45%) from your next paycheck, just as if you had received a $5,000 bonus.

The withholding amount depends on your tax bracket and how your employer calculates it. Some employers withhold a flat percentage (often 22% for federal income tax, though this is not your actual tax rate). Others use the supplemental wage withholding method, which may withhold more or less depending on your other income. Either way, the amount withheld is an estimate; you may owe more tax when you file your return, or you may receive a refund.

Your employer reports the vesting income on your W-2 in Box 1 (wages) and Box 12 (with code V for RSUs in some cases, though not all employers use this code). You will also receive a statement showing the number of shares that vested, the vesting date, and the fair market value on that date. Keep this document—you will need it to calculate your capital gains tax later.

Capital gains tax when you sell

Once you own the shares, you can hold them or sell them whenever you choose. If you sell, the difference between the sale price and the vesting price is a capital gain or loss. The tax rate depends on how long you held the shares after vesting.

If you sell more than one year after the vesting date, you pay long-term capital gains tax. The federal rate is 0%, 15%, or 20% depending on your income level. Most people in the middle income range pay 15%. If you sell within one year of vesting, you pay short-term capital gains tax, which is taxed at your ordinary income tax rate—the same rate as your salary.

Example: You receive 100 RSUs that vest on January 15 at $50 per share. You owe income tax on $5,000 that day. On February 1 of the following year (more than one year later), you sell the shares at $70 per share. Your capital gain is $20 per share, or $2,000 total. You owe long-term capital gains tax on that $2,000. If you had sold on December 15 of the same year (less than one year after vesting), you would owe short-term capital gains tax at your ordinary rate instead.

How withholding works and what you might owe at tax time

Your employer withholds taxes on the vesting-day income, but the amount withheld may not equal your actual tax bill. If you have other income, live in a high-tax state, or fall into a higher tax bracket than your employer assumed, you will owe additional tax when you file. Conversely, if the withholding was too high, you will receive a refund.

To estimate what you might owe, add the vesting-day income to your other wages and investment income for the year, then calculate your total tax using your tax bracket. Subtract the amount your employer already withheld. The difference is what you owe (or will receive back) when you file.

Some employers offer a net settlement option, which automatically sells enough shares to cover the withholding tax. For example, if 100 RSUs vest at $50 but your employer withholds $1,100 in taxes, the net settlement sells 22 shares at $50 to raise that $1,100 and deposits the remaining 78 shares into your brokerage account. This simplifies the math but means you when ready realize a small capital loss (or gain, if the stock price has risen since the vesting date).

State and local taxes on RSUs

Most states tax RSU income as ordinary income on the vesting date, just as the federal government does. Your state withholds tax from your paycheck along with federal tax. However, a few states have different rules or no income tax at all.

California, New York, and most other high-tax states treat RSU vesting as a taxable event and withhold state income tax. Some states, such as Texas, Florida, and Nevada, have no state income tax, so you owe no state tax on the vesting-day income. A handful of states, including Massachusetts and Illinois, have special rules for certain types of equity compensation, though RSUs typically follow the standard vesting-day rule.

If you move to a different state after your RSUs vest but before you sell them, you may owe tax in both states on the vesting-day income. The state where you lived on the vesting date usually has the right to tax that income. When you sell, you owe capital gains tax in the state where you live on the sale date. Some states offer credits to avoid double taxation, but the rules vary widely.

Tracking your cost basis for capital gains

Your cost basis is the price you paid for the shares, used to calculate your capital gain or loss. For RSUs, your cost basis is the fair market value on the vesting date, not the price you pay if you buy additional shares later. This is crucial because it determines how much capital gains tax you owe.

Keep detailed records of each vesting event: the date, the number of shares, the fair market value on that date, and the amount of tax withheld. Your employer should provide this information, but it is your responsibility to track it. If you receive multiple RSU grants over time, each vesting event has its own cost basis, and you must track them separately.

When you sell, specify which shares you are selling if you have multiple lots with different cost bases. You can use the "highest cost basis" method (selling the most expensive shares first to minimize gains) or "first in, first out" (FIFO), depending on your broker and tax strategy. Inform your broker in writing which method you want to use; if you do not, most brokers default to FIFO.

Common mistakes and how to avoid them

The biggest mistake is forgetting that vesting triggers a tax bill. Many people assume they owe tax only when they sell, then are shocked by a large withholding on their paycheck. Plan ahead: if you receive a large RSU grant, expect a significant tax hit on the vesting date and budget for it.

Another common error is losing track of cost basis. If you receive RSUs over several years and sell some shares, you need to know the vesting price of each batch to calculate your capital gain correctly. Use your broker's cost basis tracking tools, or maintain a spreadsheet with the vesting date, number of shares, and fair market value for each grant.

A third mistake is selling too quickly. If you sell within one year of vesting, you pay short-term capital gains tax at your ordinary income rate, which is often much higher than the long-term rate. If the stock price has risen, holding for more than one year can save you thousands in taxes. However, do not let tax considerations override your investment strategy; if you need the money or believe the stock will fall, sell when it makes sense for your finances.

Finally, do not ignore state taxes. If you live in a high-tax state and receive a large RSU grant, your state tax bill can be substantial. Some people relocate to lower-tax states before vesting to reduce their tax burden, though this is complex and requires careful planning with a tax professional.

Frequently Asked Questions

Do I have to sell my RSUs when they vest?

No. Vesting means the shares are now yours and you can sell them whenever you choose, but you are not required to sell. You can hold them indefinitely. However, you still owe income tax on the vesting-day value, even if you never sell. Your employer withholds this tax automatically.

What if the stock price drops after my RSUs vest?

You still owe income tax on the vesting-day value. If you sell later at a lower price, you can claim a capital loss on the difference. For example, if RSUs vest at $50 and you sell at $40, you have a $10 capital loss per share that you can use to offset other capital gains or up to $3,000 of ordinary income per year.

How do I report RSU income on my tax return?

The vesting-day income appears on your W-2 in Box 1 as wages. You do not need to report it separately unless your employer made an error. When you sell, report the capital gain or loss on Schedule D (Form 1040). Your broker will send you a Form 1099-B showing the sale proceeds; use this and your cost basis records to calculate the gain or loss.

Can I avoid the vesting-day tax by not selling?

No. The tax is based on the fair market value on the vesting date, not on whether you sell. You owe income tax on that day regardless. However, you can defer the capital gains tax by holding the shares; it applies only when you sell.

What is the difference between RSUs and stock options?

RSUs are taxed on the vesting date at fair market value. Stock options are taxed differently: with non-may have access to options, you owe tax when you exercise (buy the shares), based on the difference between the exercise price and the fair market value. With incentive stock options (ISOs), you may owe no tax when you exercise if you meet certain holding requirements, though the alternative minimum tax (AMT) may explore. Consult a tax professional if you have options.