How RSUs Are Taxed When You Receive Them and When You Sell

RSUs are taxed as ordinary income twice: once when they vest, and again if the stock price rises before you sell

Restricted stock units (RSUs) trigger a tax bill the moment they vest, even if you never sell them. The IRS treats the fair market value of the shares on the vesting date as wages you earned that year. If the stock price then climbs and you sell at a profit, you owe a second tax on that gain — either as ordinary income or capital gains, depending on how long you held the shares after vesting.

Most people are surprised by the first tax because they receive no cash. Your employer withholds shares to cover the tax bill, but the amount withheld is often less than what you actually owe if the stock price rises before you sell. Understanding when each tax hits and how much to set aside can prevent a large bill at tax time.

Key Takeaways

RSUs are taxed as ordinary income on the vesting date, based on the stock price that day, whether or not you sell the shares.
Your employer withholds shares to pay the tax, but the withholding may not cover your full tax liability if you are in a high tax bracket or if the stock price rises after vesting.
If you sell the shares after vesting, any gain or loss between the vesting price and the sale price is taxed as a capital gain or loss, not ordinary income.
The holding period for long-term capital gains treatment starts on the vesting date, not the grant date, so you need to hold for one year after vesting to may have access to.
You report the vesting event on your W-2 as wages, and the capital gain or loss on Schedule D when you file your tax return.

What happens on the vesting date

On the day your RSUs vest, your employer calculates the fair market value of one share and multiplies it by the number of shares vesting. That total is ordinary income, taxed at your marginal rate — the same rate as your salary. If 100 RSUs vest when the stock price is $50 per share, you have $5,000 of ordinary income that year.

Your employer withholds shares to cover the estimated tax. If your combined federal, state, and local tax rate is 40%, the company withholds 40 shares (worth $2,000) and deposits that amount to the IRS on your behalf. You receive 60 shares in your brokerage account. The withholding appears on your W-2 as wages in Box 1.

The problem arises if your actual tax rate is higher than the withholding rate, or if you live in a state with income tax that your employer did not withhold for. You may owe additional tax when you file. Conversely, if your rate is lower than the withholding, you may receive a refund.

How to calculate your tax bill at vesting

To estimate what you owe, multiply the number of vesting shares by the stock price on the vesting date, then multiply that total by your marginal tax rate (federal plus state plus local, if applicable). This is your ordinary income tax on the vesting event.

For example: 100 RSUs vest at $50 per share = $5,000 ordinary income. If your combined marginal rate is 45%, you owe $2,250 in tax. If your employer withheld only $2,000 (at a 40% rate), you have a shortfall of $250 that you must pay when you file your return.

If you are unsure of your marginal rate, look at your most recent pay stub. Divide the total tax withheld by your gross pay to estimate your effective rate, then add a few percentage points to account for state and local taxes. This gives you a rough withholding rate to compare against what your employer actually withheld from the RSU vesting.

What happens if you sell the shares later

Once the shares are in your account, they are treated like any stock you own. If you sell them, you have a capital gain or loss equal to the sale price minus the vesting price (not the grant price). This gain or loss is separate from the ordinary income you already paid tax on at vesting.

If you sell the shares less than one year after vesting, the gain is short-term capital gain, taxed as ordinary income at your marginal rate. If you hold for one year or more after the vesting date, the gain is long-term capital gain, taxed at the preferential rates of 0%, 15%, or 20%, depending on your income level.

Example: 100 RSUs vest at $50 per share on January 15, 2024. You sell on March 1, 2024 (less than one year) at $60 per share. You have a short-term capital gain of $1,000 (100 shares × $10 gain), taxed as ordinary income. If you had held until January 16, 2025 and sold at $60, the same $1,000 gain would be long-term capital gain, taxed at 15% instead of your marginal rate.

How to report RSUs on your tax return

The vesting event appears on your W-2 in Box 1 (wages) and Box 2 (federal income tax withheld). You do not file a separate form for the vesting itself — it is already included in your W-2 total wages. When you file your Form 1040, the W-2 amount flows into your income automatically.

When you sell the shares, you report the transaction on Schedule D (Capital Gains and Losses). List the vesting date as your acquisition date, the vesting price as your cost basis, the sale date as the disposition date, and the sale price as the proceeds. The difference is your gain or loss. If you have a long-term gain, it goes in Part II of Schedule D; short-term gains go in Part I.

Keep records of the vesting date, vesting price, sale date, and sale price for each batch of RSUs. Your brokerage will send you a Form 1099-B showing the sale, but it may not show the correct cost basis (the vesting price) because the brokerage may not have that information. You will need to enter the basis yourself on Schedule D.

Common mistakes to avoid

The most common mistake is forgetting that you owe tax at vesting even if you do not sell. Many people hold RSUs expecting to pay tax only when they sell, then face a surprise bill. Set aside cash or plan to sell enough shares to cover the withholding shortfall if your tax rate is high.

Another mistake is confusing the vesting date with the grant date. The holding period for long-term capital gains starts on the vesting date, not the date you received the grant. If you hold for one year from the grant date but only a few months from vesting, you do not may have access to for long-term rates.

A third mistake is failing to report the cost basis correctly on Schedule D. If you list the grant price instead of the vesting price, or if you omit the transaction entirely, the IRS may assess additional tax. The vesting price is your cost basis for capital gains purposes because that is when you received the income and paid tax on it.

Strategies to manage RSU taxes

If you expect a large vesting and your employer's withholding will not cover your tax bill, you can request additional withholding on your W-4 or make an estimated tax payment to the IRS before the vesting date. This spreads the tax burden across the year instead of creating a surprise bill in April.

If the stock price has risen significantly since vesting and you want to lock in gains, you can sell some shares to cover the tax bill and hold the rest. This ensures you have cash for taxes while keeping some upside exposure. Conversely, if the stock price has fallen below the vesting price, you have a capital loss that can offset other gains or up to $3,000 of ordinary income in the current year.

In some cases, employees can defer RSU taxation through a Section 83(b) election, but this is rare and requires careful planning with a tax professional. Most employees cannot use this strategy because it requires filing within 30 days of the grant date and creates when ready tax liability even before vesting.

Frequently Asked Questions

Do I owe tax if I never sell the RSU shares?

Yes. You owe tax on the vesting date based on the stock price that day, regardless of whether you sell. The tax is ordinary income, withheld by your employer. If you hold the shares and the price falls, you have an unrealized loss, but you cannot deduct it until you sell.

What if my employer withheld the wrong amount?

If too little was withheld, you owe the difference when you file your return. If too much was withheld, you receive a refund. Check your W-2 to see the amount withheld, and compare it to your actual tax liability. If there is a large gap, contact your employer's payroll department to adjust future withholding.

Can I use losses from RSU sales to offset other income?

Yes. If you sell RSU shares at a loss, you can deduct the loss against capital gains from other investments. If you have no capital gains, you can deduct up to $3,000 of the loss against ordinary income in the current year. Any remaining loss carries forward to future years.

How do I know the vesting price if the stock trades on multiple exchanges?

Use the closing price on the vesting date on the primary exchange where the stock trades. For most U.S. companies, this is the closing price on the New York Stock Exchange or NASDAQ. Your employer's equity plan documents or your brokerage statement will show the vesting price used for tax purposes.

Are RSUs treated differently if my company is private?

Yes. For private company RSUs, the vesting price is the fair market value determined by the company, often based on a recent valuation or appraisal. The tax treatment is the same — ordinary income at vesting — but the valuation is less straightforward than for public companies. Keep documentation of how the vesting price was determined in case the IRS questions it.

This guide is for general information only and is not medical, financial, legal, or other professional advice. For decisions specific to your situation, consult a qualified professional. See our Editorial Policy.