Restricted stock units are now the default way large companies pay equity, yet every spring the same questions flood tax forums: Why is my refund gone? Why does my 1099-B show a huge gain when I never sold? Am I being taxed twice? This guide walks through the entire RSU tax lifecycle — grant, vest, sale — using plain English and worked numbers, so none of those surprises happen to you.
What an RSU actually is
A restricted stock unit is a promise: if you stay employed (and sometimes hit other conditions), the company will hand you real shares on a schedule. At grant, you receive units — bookkeeping entries, not shares. At vest, units convert into actual stock you own. Most plans vest over four years, often with a one-year “cliff” before the first chunk arrives, then quarterly or monthly after that.
Two features make RSUs simpler than stock options. First, there is no exercise price — you never pay to receive the shares. Second, vested RSUs always have value as long as the stock trades above zero. That simplicity has a flip side: there is almost nothing you can do to change how they are taxed. The tax events are fixed by the calendar of your vesting schedule.
At grant: nothing happens
Receiving an RSU grant is not a taxable event. You own nothing yet, you can lose it all by leaving, and the IRS agrees there is nothing to tax. (This also means the 83(b) election you may have read about generally does not apply to standard RSUs — that tool belongs to restricted stock and early-exercised options, which we cover in our 83(b) guide.)
At vest: the big one
The moment shares vest, their full market value becomes ordinary wage income — exactly as if your employer had paid you a cash bonus and you had used it to buy stock that same day. Three things happen, mostly invisibly:
- Your W-2 grows. The vest-date value is added to Box 1 wages. Many employers also note it in Box 14 with a label like “RSU.”
- Payroll taxes apply. Social Security tax (6.2%) applies until your year-to-date wages reach the annual wage base ($176,100 for 2025); Medicare (1.45%) applies to everything, plus the extra 0.9% Additional Medicare Tax once income passes $200,000 single / $250,000 married filing jointly.
- Shares are withheld or sold for taxes. Most companies use “sell-to-cover” or “net settlement,” so a slice of your shares disappears immediately to fund withholding. Our sell-to-cover guide dissects that mechanic.
The withholding trap: federal tax on RSU income is usually withheld at the flat 22% supplemental-wage rate (37% only on supplemental wages above $1 million in a year). If your real marginal rate is 32–37% — common once salary plus vests stack up — the difference becomes a bill in April. The withholding-gap guide shows how to estimate and close it.
Your cost basis is born at vest
Because you already paid income tax on the vest-date value, that value becomes your cost basis — the starting line for measuring future gain or loss. If 100 shares vest at $50, you have $5,000 of W-2 income and a basis of $50 per share. This single fact prevents double taxation, and it is the fact brokers routinely fail to report: many 1099-B forms show a basis of $0, leaving you to fix it. That failure is so common, and so expensive, that it gets its own guide: the $0 cost-basis trap.
At sale: only the change matters
When you eventually sell, you compare the sale price with your vest-date basis:
| Scenario | Tax consequence |
|---|---|
| Sell immediately at vest | Gain is approximately zero (maybe a few dollars of movement between vest and execution). Tiny short-term gain or loss. |
| Sell within 12 months of vest, price rose | Short-term capital gain on the rise only, taxed at ordinary rates. |
| Sell after 12 months, price rose | Long-term capital gain on the rise only — 0%, 15% or 20% federal, plus the 3.8% net investment income tax for higher incomes. |
| Sell below your basis | Capital loss, usable against other gains and up to $3,000 of ordinary income per year. |
Notice what is not on that list: any scenario where holding longer reduces tax on the vest-date value itself. That amount was ordinary income the day it vested, forever. The one-year clock only discounts the appreciation after vesting.
One grant, start to finish
Maya is granted 4,800 RSUs vesting quarterly over four years. In March, 300 shares vest at $80: $24,000 joins her W-2 income. Her employer sells 105 shares to cover combined withholding of roughly 35% (22% federal + state + payroll). Maya keeps 195 shares with a basis of $80 each.
Fourteen months later she sells the 195 shares at $95. Her taxable gain is 195 × ($95 − $80) = $2,925, long-term because she held more than a year past vest. She does not pay tax again on the $24,000 — unless she lets a $0 basis slip onto her return, in which case the IRS math would treat all $18,525 of proceeds as fresh gain. That is the entire double-tax problem in one sentence.
State taxes and moving between states
States tax RSU income too, and several have their own supplemental withholding rates — California withholds 10.23% on supplemental equity wages, for instance, and has no cap on its SDI payroll tax. If you moved states (or countries) between grant and vest, the income is usually apportioned based on where you worked during the vesting period, which is how people end up filing in two states for one vest. Remote workers and recent relocators should flag this to whoever prepares their return; payroll systems frequently assign all the income to one state by default and get it wrong. UK-based employees of US companies face a parallel cross-border version of this problem — see our UK RSU guide.
The five mistakes that actually cost money
- Accepting a $0 cost basis on the 1099-B and paying tax twice on the vest value.
- Assuming withholding covered the bill. The 22% flat rate quietly under-withholds for most six-figure earners; quarterly estimated payments or a W-4 adjustment fixes it.
- Holding only to chase long-term rates while a concentrated position grows past the point of prudence. The vest value is already taxed; what you are really deciding is whether to invest a fresh bonus entirely in one stock. Our concentration-risk guide reframes that choice.
- Forgetting the shares sold for taxes. Those sell-to-cover shares generate their own line on the 1099-B and need the same basis correction.
- Ignoring multi-state allocation after a move, leading to amended returns and penalty letters.
The paperwork map
At filing time you will reconcile three documents: the W-2 (vest income already inside Box 1), the 1099-B (every sale, including tax-withholding sales, often with the wrong basis), and the broker’s supplemental statement (the corrected, true basis — usually the only place it appears). Sales go on Form 8949 and Schedule D, with basis adjustments entered using code B on Form 8949. If you remember just one operational rule from this entire guide, make it this: never type the 1099-B basis into your tax software without checking the supplement first.
Key takeaways
- RSUs are taxed twice in time but not twice in money: once as ordinary income when shares vest, and again only on any gain or loss after vesting when you sell.
- The vest-date value of your shares lands in Box 1 of your W-2 automatically — you owe income tax on it whether or not you sell a single share.
- Federal withholding usually happens at the 22% flat supplemental rate (37% above $1M), which is often far below a tech salary's real marginal rate.
- Your cost basis is the share price on the vesting date. Brokers frequently report $0 on Form 1099-B, and it is your job to correct it.
- Selling immediately at vest is not a taxable non-event people fear — the income tax is owed either way, and an immediate sale usually produces little or no additional gain.
Frequently asked questions
Do I pay tax on RSUs if I never sell them?
Yes. The full market value of the shares on the day they vest is ordinary income, reported on your W-2, and taxed in that year regardless of whether you sell. Selling later only changes the capital-gains side of the equation.
Are RSUs taxed twice?
Not if your return is prepared correctly. The vest-date value is taxed once as ordinary income. When you sell, only the change in price since vesting is taxed as a capital gain or loss. Double taxation only happens when someone reports a $0 cost basis by mistake.
What tax rate applies to RSUs?
There is no special RSU rate. Vest-date value is ordinary income taxed at your normal marginal brackets plus payroll taxes. Post-vest appreciation is taxed at short- or long-term capital-gains rates depending on how long you hold after vesting.
Does holding RSUs for a year lower the tax on the vest amount?
No. The holding period only affects gains that occur after vesting. The vest-date value is locked in as ordinary income no matter how long you hold the shares afterward.
Educational disclaimer: This guide is general information, not financial, investment, tax or legal advice. Figures refer to the tax years stated and change over time; rules differ by jurisdiction and personal circumstances. Verify current figures with the IRS / HMRC and consult a qualified professional before acting. See our full disclaimer.