Restricted stock units, or RSUs, are a popular form of equity compensation, but their tax treatment surprises many recipients. They are taxed as ordinary income the moment they vest, not when you sell them. A second layer of capital gains tax can then apply when you eventually sell the shares.

Taxed as income at vesting

When your RSUs vest, the market value of the shares on that date is treated as ordinary wage income and added to your W-2. This happens whether or not you sell any shares — vesting alone creates a taxable event. The amount is subject to income tax as well as Social Security and Medicare, just like salary. Many people are caught off guard because they owe tax on stock they still hold.

Withholding often falls short

Employers usually withhold taxes on vesting, often by selling a portion of the shares to cover it. But the default withholding rate for supplemental wages may be lower than your actual marginal rate, leaving you underwithheld. High earners frequently owe additional tax in April on their vested RSUs. Checking whether enough was withheld — and making an estimated payment if not — prevents a surprise bill.

Capital gains on later sales

After vesting, your cost basis in the shares is their value on the vesting date — the amount you already paid income tax on. If you sell later for more, the additional gain is a capital gain; sell for less and you have a capital loss. Holding more than a year after vesting qualifies any further gain for lower long-term rates. Only the change in price after vesting is subject to capital gains, not the whole value.

The double-counting trap

A very common error is paying tax twice on the vesting value — once as wages and again as if the full sale price were a capital gain. Because the vesting value is already in your W-2 and becomes your basis, you must subtract it when calculating the gain. Brokers sometimes report a basis of zero, so you have to correct it on your return. Getting the basis right can save hundreds or thousands in wrongly reported gains.

You vest 100 shares worth $50 each, adding $5,000 of wage income to your W-2 and its tax. A year later you sell at $70, so your gain is only $20 per share ($2,000 total) above the $50 basis — not the full $70 — and it qualifies for long-term capital gains rates.

Key takeaways

  • RSUs are taxed as ordinary wage income at their value on the vesting date.
  • Vesting is taxable even if you do not sell any shares.
  • Employer withholding on RSUs is often too low, so high earners may owe more in April.
  • Your cost basis equals the vesting-date value already taxed as income.
  • Only price appreciation after vesting is a capital gain — do not double-count the vesting value.

Common mistakes

FAQ

Should I sell my RSUs right when they vest?

Selling at vesting locks in the value with essentially no additional capital gain, which many people favor to avoid overconcentration in their employer's stock, though it is a personal decision.

Are RSUs taxed differently from stock options?

Yes — RSUs are taxed as income at vesting with no purchase required, while stock options involve a purchase price and have their own distinct tax rules.