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

When your restricted stock units (RSUs) vest — meaning the company releases them to you — the fair market value of those shares on the vesting date counts as ordinary income. Your employer withholds taxes on that amount just as they would on a bonus or salary. If 100 RSUs vest when the stock is worth $50 per share, you owe income tax on $5,000 that year, even if you never sell the shares.

If you hold the shares after vesting and the stock price rises, that gain is taxed separately as a capital gain when you eventually sell. If the stock price falls, you have a capital loss. But the vesting event itself — that first tax hit — is ordinary income no matter what happens to the stock afterward.

This is different from stock options, where you only pay tax when you exercise them and then again when you sell. With RSUs, the vesting date is the taxable event, and you cannot defer it by holding the shares.

Key Takeaways

  • The fair market value of RSUs on the vesting date is taxed as ordinary income in the year they vest, regardless of whether you sell them.
  • Your employer typically withholds taxes automatically from your RSU vesting, so you may not owe additional tax at filing time.
  • Any gain or loss between the vesting price and the sale price is taxed as a capital gain or loss, separate from the ordinary income tax.
  • If you receive RSUs worth $10,000 and the stock rises to $12,000 before you sell, you owe ordinary income tax on $10,000 and capital gains tax on the $2,000 gain.

How withholding works when RSUs vest

Most employers automatically withhold taxes when RSUs vest. They sell enough shares to cover the withholding obligation and deposit the tax to the IRS on your behalf. The withholding rate is usually your ordinary income tax bracket, which means federal income tax, Social Security tax (6.2%), and Medicare tax (1.45%) if you are a W-2 employee.

Some employers offer a choice: withhold by selling shares, or withhold by cash payment from your paycheck. If you choose cash withholding, you keep all the shares but pay taxes out of pocket. Either way, the withholding is not the final tax bill — it is an estimate based on your tax bracket. You may owe more or less when you file your return, depending on your total income for the year.

Your employer will report the vesting value on your W-2 as wages in Box 1, just like salary. This amount is already included in the gross income your employer reports, so you do not add it again on your tax return.

The difference between vesting and selling

The tax on vesting and the tax on selling are separate events. On the vesting date, you owe ordinary income tax on the full fair market value. On the sale date, you owe capital gains tax only on the difference between what the stock was worth when it vested and what you sold it for.

If RSUs worth $5,000 vest and you sell them the same day for $5,000, you owe ordinary income tax on $5,000 and no capital gains tax. If you hold them and sell for $6,000 six months later, you owe ordinary income tax on $5,000 and short-term capital gains tax on $1,000 (because you held them less than a year). If you sell for $6,000 after holding them more than a year, the $1,000 gain is taxed as a long-term capital gain, which has a lower rate than short-term gains.

If the stock falls to $4,000 before you sell, you owe ordinary income tax on the original $5,000 vesting value, but you can claim a $1,000 capital loss on the sale. That loss can offset other capital gains or up to $3,000 of ordinary income in the current year.

How to report RSU income on your tax return

The vesting value appears on your W-2 in Box 1 as wages. You do not need to report it separately on your return — it is already included in your total income. When you file, the IRS cross-checks your W-2 against your return, so the amount must match.

When you sell the shares, your brokerage sends you a Form 1099-B showing the proceeds. You report the sale on Schedule D (Capital Gains and Losses) using the vesting date as your cost basis, not the purchase price. The cost basis is the fair market value on the vesting date, which your employer should have reported to you.

Keep records of the vesting date, vesting price, and sale date for each batch of RSUs. If your employer does not provide a cost basis statement, ask for one — you will need it to calculate the capital gain or loss correctly.

State and local taxes on RSUs

Most states tax RSU vesting as ordinary income, just like the federal government. Some states have no income tax (Texas, Florida, Nevada, and others), so residents of those states owe only federal tax on vesting. If you live in a state with income tax but work for a company in another state, you may owe tax to both states, depending on where you perform the work.

A few states, including California, tax RSUs based on where the work was performed, not where you live. If you worked in California when the RSUs vested, California taxes the income even if you moved out of state before vesting. Some states also have local income taxes (New York City, Philadelphia, and others) that apply on top of state tax.

When you sell the shares, capital gains are taxed by your state of residence, not the state where the company is located. If you move to a lower-tax state after vesting but before selling, the capital gain is taxed in your new state.

RSUs and the alternative minimum tax (AMT)

If you have a very high income, RSU vesting can trigger the alternative minimum tax (AMT), a parallel tax system that applies when your income exceeds certain thresholds. The AMT is calculated separately from ordinary income tax, and you pay whichever is higher.

RSU vesting is included in AMT income the same way it is in ordinary income, so it can push you over the AMT threshold. If you are subject to AMT, you may owe more tax than your ordinary income tax bracket would suggest. The AMT thresholds change each year and vary by filing status, so check the IRS website or consult a tax professional if your income is very high.

What to do if you receive a large RSU grant

If you receive a large grant of RSUs that will vest over several years, plan for the tax impact in advance. Vesting is spread across years, so the tax bill is usually spread too — but if you receive multiple grants or if the stock price rises significantly, a single year's vesting could push you into a higher tax bracket.

Some people use tax-loss harvesting to offset RSU gains: they sell other investments at a loss to reduce their overall capital gains tax. Others adjust their withholding or make estimated tax payments to avoid owing a large bill at filing time. If you expect a significant vesting event, talk to a tax professional before it happens so you can plan.

Keep in mind that selling RSUs immediately after vesting (called a "sell-to-cover" strategy) locks in the vesting price and eliminates the risk that the stock will fall before you sell. But it also means you miss any upside if the stock rises. The choice depends on your risk tolerance and your view of the company's stock.

Frequently Asked Questions

Do I owe tax on RSUs if I never sell them?

Yes. You owe ordinary income tax on the vesting date based on the stock price that day, whether you sell immediately or hold forever. If you never sell, you still owe the tax. The only way to avoid the tax is to forfeit the RSUs before they vest (for example, by leaving the company before the vesting date).

What if my company's stock price drops after vesting?

You still owe ordinary income tax on the vesting price, not the lower price you see later. But when you sell at the lower price, you can claim a capital loss for the difference. That loss can offset other capital gains or up to $3,000 of ordinary income per year.

Are RSUs taxed differently if I work for a startup?

No. The tax rules are the same regardless of company size. Startup RSUs are taxed as ordinary income on the vesting date, just like RSUs from a large public company. The difference is that startup stock may be harder to value if it is not publicly traded — your company should provide a fair market value for tax purposes.

Can I defer the tax on RSUs until I sell?

No, not with standard RSUs. The tax is due on the vesting date. Some companies offer restricted stock awards (RSAs) or restricted stock instead, which allow you to make an 83(b) election to defer tax until you sell, but this is rare and comes with its own risks. Ask your company's benefits team if this option is available.

How do I know the fair market value for tax purposes?

For publicly traded stock, the fair market value is the closing price on the vesting date. Your brokerage and your employer should both report this to you. For private company stock, the company determines the fair market value, usually based on a recent valuation or appraisal. Your company should provide this value in writing for tax purposes.