How are RSUs taxed? Income, withholding, and capital gains explained

How are RSUs taxed? The short answer is that RSUs generally have two tax moments: vesting and sale. At vesting, the fair market value of the delivered shares is treated as ordinary income. At sale, any change in value after vesting may create a capital gain or loss.

Seems simple enough, but in practice RSUs can introduce several layers of tax complexity. For instance, the withholding applied at vesting might not match the actual tax owed, the sale can be reported in ways that create confusion about cost basis, and a year with multiple vesting events can produce a much larger tax bill than expected.

(For a broader look at planning decisions across the RSU lifecycle, see our RSU tax planning guide.)

How are RSUs taxed?

RSUs differ from stock options in that there is no exercise step. With options, the employee makes an active choice to buy shares at a set price. With RSUs, shares are simply delivered to your account at vesting. That delivery is the taxable event, and it happens whether or not you do anything at all.

From there, the tax treatment follows the shares.

• At vesting, the fair market value of the shares is treated as compensation, reported on your W-2, and taxed at ordinary income rates.
• After vesting, the shares behave like any other investment. A later sale at a higher price generally produces a capital gain. A sale at a lower price produces a capital loss.
• How long the shares are held after vesting determines whether that gain or loss is taxed at short-term or long-term rates.

Are RSUs taxed when they are granted?

RSUs are generally not taxed when they are granted. At that point, all you have is a right to receive future shares, not the shares themselves.

The grant date and grant price may be relevant for recordkeeping, but they do not create a tax obligation. The tax event begins at vesting, when shares are actually delivered.

How RSUs are taxed at vesting

When RSUs vest, the tax process follows a set schedule:

1. The RSUs vest and shares are delivered to the employee
2. The fair market value of the shares on that date is treated as income, taxed at the same ordinary income rate as your salary.
3. That income will generally be included on your W-2 in the year of vesting.
4. Taxes are withheld based on the RSU value at vesting.

The vest-date value also becomes your cost basis in the shares. That matters later, when calculating whether a sale produces a capital gain or loss.

For example, if an employee has 500 RSUs that vest at $80 per share, that creates an additional $40,000 of ordinary income that is added to their W-2 for that year and the $80 per-share price becomes the cost basis for any future sale calculation. (Note: This example is illustrative only. It excludes state income taxes, payroll taxes such as Social Security and Medicare, additional withholding, and individual tax circumstances.)

How RSU withholding works

When RSUs vest, employers are required to withhold taxes on the value of those shares. The withholding method will vary depending on the employer and how their equity plan is set up.

• Share withholding: One of the most common approaches. With share withholding, the employer withholds a portion of the shares that would otherwise be delivered, sells them on the employee’s behalf, and uses the proceeds to cover taxes.
• Sell-to-cover: A similar approach under which shares are delivered and then a portion is sold immediately to cover the withholding obligation.
• Cash withholding: Where available, cash withholding allows the employee to pay the tax obligation in cash rather than surrendering shares.
• Supplemental wage withholding: Supplemental wages are payments made to an employee outside of their regular salary, and RSU income falls into this category. For this type of income, the IRS allows employers to withhold at a flat rate rather than using the employee’s W-4 elections.

Each method results in taxes being paid, but none of them automatically calculates or settles the employee’s full tax liability for the year. Withholding is a prepayment. The final tax calculation happens when you file your return.

(For more, see our article about RSU withholding.)

Why RSU withholding may fall short

Sometimes RSU withholding does not cover the full tax bill. Often this is because employers apply the default supplemental wage withholding rate, which for federal taxes is currently 22% for amounts below $1 million, which might be lower than the rate due on RSU income, particularly for employees in higher marginal tax brackets.

Remember, RSU income stacks on top of salary, bonuses, and any other income for the year. An employee whose combined income pushes them into the 32% or 37% federal bracket will owe more than what a 22% withholding would cover, and that gap often won’t show up until your return is filed.

State taxes add another layer. Many states impose income tax on RSU income at vesting, and the state withholding applied may not fully account for the employee’s state marginal rate.

Multiple vesting events in a year can compound this. An employee with quarterly vesting events, an annual bonus, and other income sources may find that the cumulative shortfall across all of those events is meaningful by the time April arrives.

How RSUs are taxed when you sell

After vesting, the shares you receive are treated like any other investment. The vest-date fair market value is the cost basis. The sale price is then compared with that basis.

• If the sale price is higher than the vest-date value, the employee generally has a capital gain.
• If the sale price is lower than the vest-date value, the employee generally has a capital loss.

The holding period for determining whether a short-term or long-term tax rate applies begins at vesting, not at the grant of the RSUs.

Same-day sale vs. selling later

When to sell shares after vesting can be one of the more consequential tax decisions around RSUs.

Same-day sale: When shares are sold at or very near vesting, the capital gain or loss is typically small because the sale price and cost basis are nearly the same.

Selling later: If the shares are held after vesting and the price changes, that movement can create a capital gain or loss that did not exist at the time of vesting. The longer the shares are held, the more the price can diverge from the cost basis.

Neither approach is inherently better from a tax perspective. It depends on your tax bracket, stock concentration, and broader financial circumstances.

Short-term vs. long-term capital gains on RSUs

The holding period from the vest date to the sale date determines how any gain is taxed.

If shares are sold within one year of vesting, any gain is generally treated as a short-term capital gain, taxed at ordinary income rates.

If shares are sold more than one year after vesting, a gain may qualify for long-term capital gains rates, which are generally lower than ordinary income rates, depending on the taxpayer’s total income.

A capital loss on shares sold below the vest-date basis can potentially offset capital gains elsewhere in the portfolio.

What tax forms report RSU income and sale activity?

RSU income and sale activity typically appear across several different documents:

W-2: The ordinary income recognized at vesting is included in Box 1 of the W-2 as wages. It might also be reported in Box 12 or Box 14.

Paystub: In the pay period when RSUs vest, your paystub will typically reflect the vesting income and the taxes withheld.

1099-B: When shares are sold, your brokerage issues a Form 1099-B reporting the sale proceeds and, in many cases, a cost basis figure.

Supplemental statement from your brokerage: These can offer more detail on how the cost basis was calculated, including the vest date, the fair market value at vesting, and any adjustments made.

Sometimes the cost basis shown on the 1099-B may need review or adjustment because the vesting income was already included on the W-2. It’s worth reviewing the cost basis against vest-date records and your W-2 to avoid paying tax twice on the same income. A tax professional can help reconcile these figures.

Example: RSUs sold immediately after vesting

Consider the following example:

• Holding: 500 vested RSUs
• Stock Price: $80 per share
• Income: $40,000 of ordinary income

Shortly after vesting, the employee sells the shares at $80.50 per share for proceeds of $40,250. Their cost basis is $40,000, so the difference of $250 may be treated as a short-term capital gain. The primary tax event in this scenario is the ordinary income at vesting. The capital gain from the sale, if any, is small.*

Example: RSUs held and sold later

What happens if the employee holds onto their shares for a while?

Using the figures above, let’s say that the employee sells the shares for $100 each 14 months after vesting, a gain of $20 per share. Since the shares were held for more than one year, that gain may qualify for long-term capital gains treatment.

If instead the shares had been sold at $65 per share, the $15 per-share decline below the $80 cost basis would represent a potential capital loss of $7,500, which might help offset capital gains elsewhere.*

*Note: Both of these examples are illustrative only and assume all 500 vested shares are available for sale and that withholding is handled separately. They exclude state taxes, payroll taxes, fees, and individual circumstances. Actual tax treatment depends on timing, holding period, and individual circumstances.

Common RSU tax mistakes

Assuming RSUs are taxed only when sold. RSU income is recognized at vesting, regardless of whether shares are sold then or not.

Assuming no tax is due because shares were not sold. Remember, the vesting event itself is the tax trigger, not the sale.

Assuming employer withholding covers the full tax bill. Withholding at the supplemental rate may fall short, particularly for employees in higher brackets or those with multiple income sources.

Not reviewing the 1099-B cost basis. The cost basis reported by the brokerage may not reflect the vest-date value already taxed as income.

Ignoring the holding period. The vest date is important because it starts the holding period used to determine whether a later gain is short-term or long-term.

Overlooking state taxes. RSU income and capital gains are often subject to state income tax as well as federal, and the state withholding at vesting may not fully cover this liability, particularly in higher-tax states.

Forgetting the compounding effect of multiple vesting events. Employees with quarterly vesting or multiple grant schedules may have more RSU income in a given year than they realize.

Questions to ask before your RSUs vest or sell

• When do my RSUs vest, and how many shares are included?
• What is the estimated fair market value at vesting, and what income will that create?
• How much tax will my employer withhold?
• Will the vesting income appear on my W-2, and where?
• What will my cost basis be in the shares after vesting?
• Will I sell immediately or hold the shares after vesting?
• If I hold, how much price movement might create a meaningful capital gain or loss?
• Will state taxes apply to my RSU income and any future sale?
• How will the sale be reported on Form 1099-B?
• Could my cost basis need review to avoid paying twice on the same income?

Why RSU taxes depend on timing

RSUs are taxed in stages, and each stage is shaped by a different set of variables. Grant typically involves no tax obligation, but vesting creates ordinary income based on the fair market value at delivery. Selling shares later can result in a capital gain or loss based on the difference between the sale price and the vest-date value.

The timing of each of these events matters, because when shares vest, how much tax is withheld, when they are sold, how long they are held, and what state the employee lives in can all impact the final tax outcome.

Understanding the mechanics before RSUs vest creates more room to make informed decisions and avoid surprises at tax time.