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

A restricted stock unit (RSU) is a promise from your employer to give you company stock at a future date, usually after you hit a milestone like staying at the company for a certain number of years. When that date arrives and the stock is handed over, the IRS treats it as income. You owe tax on the value of the stock on the day it vests, whether or not you sell it. Then, if you later sell that stock for more than it was worth on vesting day, you owe a second tax on the profit.

Most people are surprised by the first tax bill because they do not yet own cash—they own stock. Your employer usually withholds the tax by selling some of your shares automatically on vesting day. If they do not, you will owe the money when you file your tax return.

Key Takeaways

  • RSUs trigger ordinary income tax on the day they vest, based on the stock price that day, whether you sell the shares or hold them.
  • Your employer typically withholds tax by selling some shares automatically, but you may owe more or less when you file your return depending on the final stock price.
  • If you sell the stock later for more than it was worth on vesting day, you owe capital gains tax on the profit; if you sell for less, you may be able to claim a loss.
  • The tax you owe at vesting is based on the fair market value of the stock on that specific date, not the price you paid or the price you later sell it for.
  • RSUs are reported on your W-2 as wages, and the withholding appears on your pay stub just like any other deduction.

The vesting date is the taxable event, not the grant date or sale date

The day your RSU vests is the day the IRS cares about. On that date, your employer transfers the actual shares to you, and the value of those shares becomes taxable income. This is true even if you never sell the stock, even if the stock price drops the next day, and even if you plan to hold it for decades.

The tax is calculated using the fair market value of the stock on the vesting date. If your company is public, this is the closing price on that day. If your company is private, your employer will assign a value, often based on a recent valuation or appraisal. You cannot choose a lower value or wait for a better price—the vesting date value is locked in.

For example: you receive an RSU grant of 100 shares on January 1. The stock is worth $50 per share on that date. The RSU vests on January 1 of the following year, when the stock is worth $80 per share. You owe income tax on $8,000 (100 shares × $80), not $5,000. If the stock drops to $60 by the time you sell it, you cannot go back and reduce your tax bill.

Your employer withholds tax by selling shares on vesting day

When RSUs vest, your employer is required to withhold income tax and payroll taxes (Social Security and Medicare). They do this by automatically selling enough of your shares to cover the tax bill and sending the proceeds to the IRS and your state. The number of shares sold depends on your tax bracket and the withholding rate your employer uses.

This withholding appears on your pay stub as a deduction, just like any other tax withholding. The shares that are sold are gone—you do not receive them. The remaining shares are yours to keep or sell as you choose.

The withholding is an estimate. If your actual tax bill turns out to be higher (because your total income for the year is higher than expected), you will owe the difference when you file your tax return. If the withholding is higher than your actual tax bill, you will receive a refund. This is the same process as withholding on a regular paycheck.

Capital gains tax applies when you sell the shares

After vesting, the shares you own are treated like any other stock investment. If you sell them for more than they were worth on the vesting date, you owe capital gains tax on the profit. If you sell them for less, you may be able to claim a capital loss.

The holding period matters. If you sell the shares more than one year after the vesting date, you owe long-term capital gains tax, which is usually lower than ordinary income tax rates. If you sell within one year of vesting, you owe short-term capital gains tax, which is taxed at your ordinary income tax rate.

Example: your RSU vests on January 15 when the stock is worth $80 per share. You sell the stock on February 1 of the following year at $100 per share. You owe long-term capital gains tax on the $20 per share profit (100 shares × $20 = $2,000 gain). If you had sold on January 10 of the same year at $100, you would owe short-term capital gains tax on the same $2,000 gain, but at a higher rate.

Withholding rates vary by employer and may not cover your full tax bill

Employers typically withhold between 37% and 50% of the vesting value for federal income tax, depending on the company's policy and your circumstances. Some employers use a flat rate; others calculate based on your W-4 form. State and local taxes are withheld separately and vary by location.

The withholding is often not enough. If you have other income during the year, or if you live in a high-tax state, your actual tax bill may be significantly higher than what was withheld. You are responsible for paying the difference when you file your return. Some people set aside money from their paycheck or other income to cover this gap.

You can ask your employer's payroll or benefits department what withholding rate they use and whether you can request a higher withholding. Not all employers allow this, but it is worth asking if you expect a large tax bill.

Private company RSUs may have different timing and valuation rules

If your company is private, the vesting date and the taxable date may not be the same. Many private companies allow you to defer taxation until a later event, such as an IPO or acquisition. This is called a Section 409A deferral, and it requires specific language in your RSU agreement.

Private company RSUs are also valued differently. Your employer will assign a fair market value based on recent funding rounds, independent appraisals, or other methods. This value may be much lower than what the company is actually worth, or it may be higher. You have limited ability to challenge the valuation, but you can ask your employer how they arrived at it.

If your company is acquired or goes public, the value of your RSUs may change dramatically. The tax you owed at vesting was based on the old valuation, so you may end up with a large capital gain or loss when you eventually sell the shares. Keep records of the vesting date and vesting price for your tax return.

You report RSU income on your tax return using the W-2 and Form 8949

The income from vesting RSUs appears on your W-2 form in Box 1 (wages) and Box 2 (federal income tax withheld). You do not need to do anything special to report this—it is already included in your total wages for the year.

When you sell the shares, you report the sale on Form 8949 (Sales of Capital Assets) and Schedule D (Capital Gains and Losses). You will need the vesting date, vesting price, sale date, and sale price for each batch of shares. Your brokerage will send you a Form 1099-B showing the sales, but it may not have the correct cost basis (the vesting price), so you may need to correct it.

If you have a large loss on the sale, you can use it to offset other capital gains or up to $3,000 of ordinary income in a single year. Any loss beyond that carries forward to future years.

Frequently Asked Questions

Do I owe tax on RSUs if I do not sell the shares?

Yes. You owe income tax on the vesting date based on the stock price that day, regardless of whether you sell. The tax is due whether you hold the shares forever or sell them the next day. This is different from regular stock options, where you only owe tax when you exercise them.

What happens if the stock price drops after vesting?

You still owe tax on the vesting-day value. If you later sell the shares for less than that value, you can claim a capital loss on your tax return. The loss offsets other gains or up to $3,000 of ordinary income per year, with any excess carrying forward to future years.

Can I avoid the tax by not selling the shares?

No. The tax is owed on the vesting date, not the sale date. You cannot defer or avoid it by holding the shares. However, if you hold the shares for more than one year after vesting before selling, any profit is taxed at the lower long-term capital gains rate instead of your ordinary income rate.

How do I know what price to use for the vesting date if my company is private?

Your employer will tell you the fair market value they assigned on the vesting date. This appears in your vesting notice or in the equity management system your company uses. If you do not see it, ask your benefits or payroll department. Keep this number for your tax records.

What if my employer withheld too much or too little tax?

If too much was withheld, you will receive a refund when you file your tax return. If too little was withheld, you will owe the difference. This is determined when you file and depends on your total income for the year, your filing status, and your deductions. You can adjust future withholding by asking your employer to withhold more if you expect another large vesting.