RSUs are taxed at vesting, not when you sell them

Restricted Stock Units (RSUs) create a tax bill on the day they vest, not when you buy them, not when you sell them, and not when the stock price rises. The moment your employer releases the shares to you — typically after you hit a time milestone or performance target — that vesting date is your tax event. The IRS treats the fair market value of those shares on that exact day as income you must report.

This is the single most important rule about RSU taxation, and it catches many people off guard. You can owe taxes on shares you have not yet sold and may never intend to sell. If your company stock drops 30 percent the day after vesting, you still owe tax on the higher vesting-day price. If you hold the shares for years and they triple, the gain is taxed again when you finally sell — but the vesting-day tax bill does not change.

Key Takeaways

  • RSUs trigger a tax bill on the vesting date, calculated using the stock price on that day, regardless of whether you sell the shares.
  • Your employer withholds taxes at vesting by selling enough shares to cover the tax bill, which is why you may receive fewer shares than you expected.
  • A second tax event occurs when you sell the shares: gains or losses from the vesting price to the sale price are taxed as capital gains.
  • If your RSUs vest over multiple years or in multiple tranches, each vesting date is a separate tax event with its own calculation.
  • The tax rate at vesting depends on your income bracket and whether your employer uses net or gross settlement for withholding.

How the vesting-day tax is calculated

On the vesting date, the IRS counts the fair market value of the shares as ordinary income. If 100 RSUs vest and the stock price is $50 per share on that day, you have $5,000 of taxable income. This is added to your W-2 wages for the year and taxed at your ordinary income tax rate — which could be 22 percent, 24 percent, 32 percent, or higher, depending on your total income and filing status.

Your employer does not wait for you to file taxes in April. Instead, they withhold taxes when ready by selling some of your vested shares and using the proceeds to pay the IRS and your state. If you live in a state with income tax, your employer withholds both federal and state tax. The number of shares sold for withholding is calculated to cover the estimated tax bill, which means you receive fewer shares in your brokerage account than the number of RSUs that vested.

The withholding method matters. Some employers use net settlement, which means they sell just enough shares to cover the taxes and you keep the rest. Others use gross settlement, which means they sell shares equal to the full vesting amount and you receive the after-tax proceeds in cash. Net settlement is more common and more favorable to you, because you keep more shares.

The second tax event: selling the shares

After vesting, the shares sit in your brokerage account like any other stock you own. When you sell them, you owe capital gains tax on the difference between the vesting price and the sale price. If the stock rose from $50 to $70, you have a $20-per-share gain, taxed as a capital gain. If it fell to $40, you have a $10-per-share loss, which can offset other capital gains or up to $3,000 of ordinary income in a single year.

The holding period determines the tax rate. If you sell within one year of vesting, the gain is short-term capital gain, taxed at your ordinary income rate. If you hold for more than one year, it is long-term capital gain, taxed at 0 percent, 15 percent, or 20 percent depending on your income — rates that are usually lower than ordinary income rates. This is why many people hold RSUs for at least a year after vesting: the tax savings can be substantial.

Multi-year vesting schedules create multiple tax events

Most RSU grants vest over four years, with 25 percent vesting each year on the anniversary of the grant date. This means you have four separate vesting dates, each with its own tax calculation. If your company stock price is different on each vesting date, each tranche is taxed at a different rate.

For example, if you receive 400 RSUs granted at $40 per share, 100 units vest each year. Year one: 100 shares vest at $50 (you owe tax on $5,000). Year two: 100 shares vest at $55 (you owe tax on $5,500). Year three: 100 shares vest at $60 (you owe tax on $6,000). Year four: 100 shares vest at $65 (you owe tax on $6,500). Each year is a separate income event, and each year's shares have a different cost basis for capital gains purposes.

If you leave your job before all tranches vest, the unvested shares are forfeited and you owe no tax on them. Only the shares that actually vested before your departure date are taxable.

How to report RSU income on your tax return

The vesting-day income appears on your W-2 form in Box 1 (wages) and Box 5 (Medicare wages). Your employer reports it the same way they report your salary. You do not file a separate form or take any special action — the income is already included in your W-2 total, and your employer has already withheld tax.

When you sell the shares, you report the transaction on Schedule D (Capital Gains and Losses). The cost basis is the vesting-day price, not the grant price. If you vested 100 shares at $50 and sold them at $70, your gain is $2,000 (100 shares × $20). You report this on Schedule D and add it to your other capital gains and losses for the year.

Keep records of each vesting date, the number of shares vested, the vesting-day stock price, and the number of shares withheld for taxes. Your brokerage statement will show the cost basis, but it is your responsibility to verify it is correct. If your employer uses a different vesting price than the closing price on the vesting date, ask them to clarify — some companies use the opening price or an average price.

Tax withholding and whether it covers your actual bill

Your employer's withholding is an estimate based on your W-4 form and the assumption that RSU income is your only income source that year. If you have other income — a spouse's wages, investment income, a side business — the withholding may not be enough. You could owe additional tax when you file in April.

Conversely, if your income drops later in the year or you have large deductions, you may have withheld too much and receive a refund. The withholding is not a final calculation; it is a prepayment toward your actual tax bill, which you settle when you file your return.

If you expect RSU withholding to be insufficient, you can adjust your W-4 to increase withholding on your regular paychecks, or you can make estimated tax payments. If you expect to owe significantly more than what is withheld, talk to a tax professional before the vesting date.

State and local taxes on RSUs

Most states tax RSU income as ordinary income on the vesting date, the same way the federal government does. Your employer withholds state income tax along with federal tax. A few states — including California, New York, and Massachusetts — have specific rules about when RSU income is taxable for state purposes, and the timing may differ slightly from federal rules.

If you move to a different state between the grant date and the vesting date, the state where you live on the vesting date is the one that taxes the income. If you move after vesting but before selling, only the state where you lived at vesting taxes the vesting-day income; the state where you live at sale may tax the capital gain. This can create complexity if you relocate, so document your residency on each vesting date.

Some cities — including New York City and San Francisco — also tax RSU income. The withholding from your employer may or may not cover local tax, depending on the employer's payroll system. Check your pay stub to confirm local tax is being withheld.

Frequently Asked Questions

Do I owe taxes if I do not sell the RSUs after they vest?

Yes. The tax bill is due on the vesting date, not the sale date. Your employer withholds the tax by selling some shares for you. You owe the tax whether you keep the remaining shares, sell them later, or hold them forever. If the stock price drops after vesting, you still owe tax on the higher vesting-day price.

What happens to my RSUs if I leave the company before they vest?

Unvested RSUs are forfeited and you owe no tax on them. Only the shares that vested before your departure date are taxable. If you vest on the last day of employment, that vesting is still a taxable event. Check your grant agreement for the exact vesting schedule and any acceleration clauses that may explore if you are laid off or the company is acquired.

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

No. The tax is based on the vesting-day price, not the sale price. You cannot reduce or defer the vesting-day tax by holding the shares. However, you can reduce your total tax bill by holding the shares for more than one year after vesting, because any gain above the vesting price is taxed as long-term capital gain instead of ordinary income.

How do I know what price to use for the vesting-day value?

Use the fair market value of the stock on the vesting date. For publicly traded companies, this is the closing price on that date, or the opening price if the market was closed. Your employer's equity plan documents specify which price they use. Your brokerage statement will show the cost basis they recorded; verify it matches your grant documents.

What if my company is private and there is no public stock price?

Your company must determine a fair market value for the shares, usually through a 409A valuation performed by an independent appraiser. This valuation is the price used for tax purposes. The company provides this value to you and reports it to the IRS. If you disagree with the valuation, you may be able to challenge it, but this is rare and requires professional tax information.