RSU (Restricted Stock Unit)

Quick Definition

A Restricted Stock Unit (RSU) is a form of equity compensation where an employer promises to deliver shares of company stock to an employee after a specified vesting period. RSUs are taxed as ordinary income on the vest date, based on the fair market value of the shares that day. Unlike stock options, RSUs have intrinsic value at vesting even if the stock price has not risen.

What It Means

Companies use RSUs to compensate employees with ownership stakes, aligning incentives and retaining talent. Tech companies are the largest issuers, but RSUs appear across industries at both public and late-stage private companies.

When RSUs vest, the fair market value (FMV) of the shares on that date becomes ordinary wage income. This amount appears on your W-2 in Box 1, alongside your regular salary. You owe federal income tax at your marginal rate, Social Security tax (6.2% up to the 2026 wage base of $184,500), Medicare tax (1.45%), and any applicable state income tax.

The vest-date FMV also becomes your cost basis in the shares. When you later sell, the difference between the sale price and the vest-date FMV is a capital gain or loss. If you sell immediately at vest, the gain or loss is approximately zero.

How It Works

Grant

At grant, your company promises to deliver a set number of shares after a vesting schedule. No tax is due at grant. You do not own the shares yet, and an IRC Section 83(b) election is not available for RSUs because no property has been transferred.

Vesting

Vesting is the taxable event. On the vest date, shares are delivered to your brokerage account, and the FMV of those shares becomes ordinary compensation income. The employer withholds taxes, typically through a sell-to-cover mechanism.

Sell-to-Cover

Most public companies use sell-to-cover: at vest, the broker sells enough shares to cover federal supplemental withholding (22% flat rate for amounts under $1 million per employer per year), plus FICA and state taxes. You receive the remaining shares net of the sold portion.

Example: 1,000 RSUs vest at $200 per share. Total income: $200,000.

• Federal withholding at 22%: $44,000 (220 shares sold)
• FICA and state withholding: varies
• Shares you receive: approximately 780 shares (net of sold shares)

The Withholding Gap

The 22% supplemental withholding rate is a withholding rate, not your actual tax rate. If your total income (salary plus RSU vest) places you in the 24%, 32%, 35%, or 37% tax bracket, the company under-withholds. You owe the difference at filing.

For 2026, the 22% bracket tops out at $105,700 of taxable income for single filers. A software engineer earning $130,000 in salary is already in the 24% bracket. Every RSU dollar that vests is under-withheld by at least 2 percentage points at the federal level, plus state tax.

On $200,000 of RSU income for someone in the 32% federal bracket, the shortfall is approximately $20,000 ($200,000 x 10%). That is a surprise tax bill in April if you do not plan for it.

Post-Vest Holding and Capital Gains

After vesting, your cost basis is the vest-date FMV. If you hold the shares:

• Short-term capital gains (held 12 months or less after vest): taxed as ordinary income
• Long-term capital gains (held more than 12 months after vest): taxed at 0%, 15%, or 20% federal rates, depending on income

For 2026, the 0% long-term capital gains bracket applies to taxable income up to $49,450 (single) or $98,900 (MFJ). The 15% rate applies up to $545,500 (single). The 20% rate applies above that.

A tech worker in the 35% federal bracket holding shares for over a year pays 23.8% on long-term gains (20% plus 3.8% Net Investment Income Tax). That saves 11.2 percentage points compared to ordinary income rates.

Real-World Examples

Example 1: The Under-Withholding Surprise

A software engineer earns $130,000 base salary plus $200,000 in RSU vesting value per year. Total W-2 income: $330,000. Federal marginal bracket: 35%.

• Company withholds at 22% supplemental rate on RSU income: $44,000
• Actual federal tax on RSU income at 35%: $70,000
• Shortfall: $26,000
• Plus state tax (California, up to 13.3%): potentially another $26,600 under-withheld
• Total April surprise: potentially $50,000+

This is the most common problem for tech workers in their first year of significant RSU vesting. The fix: increase W-4 extra withholding, make quarterly estimated payments, or sell additional shares at vest to cover the gap.

Example 2: Sell Immediately and Diversify

An engineer has 1,000 RSUs vesting at $150 per share ($150,000 income). The company sells 220 shares for taxes (22% federal withholding). The engineer receives 780 shares and sells them immediately at $150.

• Ordinary income: $150,000 (reported on W-2)
• Capital gain/loss: approximately $0 (sale price equals cost basis)
• Tax result: the $150,000 is taxed as ordinary wages. No additional capital gains tax.
• Diversification: the engineer uses the $117,000 proceeds (780 x $150) to buy index funds, reducing concentration risk in their employer's stock.

Example 3: Hold for Long-Term Gains

An engineer has 500 RSUs vest at $100 per share ($50,000 income). They hold the 390 net shares (after sell-to-cover) for 14 months, then sell at $130.

• Ordinary income at vest: $50,000 (already on W-2)
• Cost basis: $100 per share ($39,000 total for 390 shares)
• Sale proceeds: 390 x $130 = $50,700
• Long-term capital gain: $50,700 - $39,000 = $11,700
• Tax on gain at 15% federal: $1,755
• If sold at vest instead: $0 capital gain, but no upside captured

Holding captures $11,700 in appreciation taxed at the preferential long-term rate. The risk: the stock could have dropped below $100 during those 14 months, creating a capital loss instead.

Key Points to Remember

• RSUs are taxed as ordinary income at vesting, not at grant and not at sale. The vest-date FMV goes on your W-2.
• The 22% federal supplemental withholding rate under-withholds for anyone in the 24% bracket or higher. Plan for the gap with estimated payments or W-4 adjustments.
• Your cost basis is the vest-date FMV, not the grant-date value. When you sell, you only pay capital gains tax on the appreciation after vesting.
• An 83(b) election does not apply to RSUs. That election is for restricted stock (actual shares transferred at grant), not RSUs (a promise to deliver shares later).
• Selling immediately at vest eliminates concentration risk and results in approximately zero capital gain. Holding for over 12 months qualifies for long-term capital gains rates but adds risk.
• State income tax on RSU vest income is sourced to the state(s) where you performed the work during the vesting period, not where you live at vesting.

Common Mistakes to Avoid

• Not planning for the withholding gap: The 22% supplemental rate is a default, not your actual tax rate. If you are in the 32% or 35% bracket, you may owe $20,000 to $30,000 more than withheld on a $200,000 vest. Set aside the difference or make estimated payments.
• Holding too much company stock: Your salary and your investments are both tied to one company. If the company struggles, you could lose your job and your portfolio simultaneously. Most financial advisors recommend selling vested RSUs immediately and diversifying into index funds.
• Reporting the wrong cost basis on your tax return: Brokerages sometimes report a cost basis of $0 or the grant-date value instead of the vest-date FMV. If you do not correct this on Form 8949, you pay tax on income you already paid tax on. Verify your 1099-B cost basis against your W-2 vesting records.
• Confusing RSUs with stock options: Stock options give you the right to buy shares at a set price. RSUs give you shares directly. Options require an exercise decision. RSUs vest automatically. The tax treatment differs significantly.
• Forgetting about state tax sourcing: If you worked in California for 3 years of a 4-year vesting schedule and then moved to Texas, California may still tax 75% of the RSU vest income. Moving states does not eliminate tax liability accrued during prior residency.

Frequently Asked Questions

Q: Are RSUs double-taxed? A: No. The vest-date FMV is taxed as ordinary income once. When you sell, only the appreciation above the vest-date FMV is taxed as a capital gain. The two events involve different tax bases. The misconception arises because both events involve the same shares, but you are not paying twice on the same dollars.

Q: Should I sell my RSUs immediately or hold them? A: Most financial advisors recommend selling immediately at vest and diversifying. Your human capital (salary) is already concentrated in your employer. Adding investment concentration increases risk. If you want to hold for long-term capital gains treatment, limit company stock to a small percentage of your net worth. Read our guide on how equity compensation works for a full comparison.

Q: What happens to my RSUs if I leave the company? A: You only keep RSUs that have vested. Unvested RSUs are forfeited when you leave, unless your company offers accelerated vesting (rare, usually only in acquisitions). Check your grant agreement for specific termination provisions.

Q: How do I cover the tax shortfall from RSU vesting? A: Three options: (1) Sell additional shares at vest beyond the sell-to-cover amount to fund the actual tax liability. (2) Increase your W-4 extra withholding on your salary to compensate. (3) Make quarterly estimated tax payments based on the projected gap. Most high earners use a combination.

Q: Can I use an 83(b) election on my RSUs? A: No. An 83(b) election applies to restricted stock (actual shares transferred at grant subject to forfeiture risk). RSUs are an unfunded promise to deliver shares, not transferred property. There is nothing to elect on at grant because no shares have been delivered.

Q: How are RSUs taxed if I work remotely from a different state? A: RSU vest income is sourced to the state(s) where you physically performed the work during the vesting period. If you worked in New York for 3 years of a 4-year vest and then moved to Florida, New York taxes 75% of the vest value. Check with a CPA who handles multi-state equity compensation.