How do RSUs work, and when are they taxed?

What is a restricted stock unit?

A restricted stock unit is your employer's promise to hand you shares of company stock on a schedule, usually tied to staying employed. At grant, you own nothing yet. When a portion vests, the shares become yours, and their market value that day counts as ordinary income, the same way your salary does.

That schedule is the vesting schedule, and it rewards a close read. A common pattern releases shares quarterly over four years, sometimes with a one-year wait before the first batch. Unlike stock options, RSUs never require you to buy anything, and they hold value as long as the stock itself does. That makes them less of a lottery ticket and more of a deferred, stock-denominated bonus.

Companies usually quote a grant in dollars and convert it to shares, so the share count is fixed early even though its value keeps moving. Refresher grants often arrive at review time and stack on top of the original, which is why the full picture deserves a fresh map once a year rather than once a career.

When are RSUs taxed?

RSUs are taxed when they vest, not when you sell. The market value of the vested shares lands on your W-2 as ordinary income for that year. From that day forward, only additional growth or decline is treated as a capital gain or loss, measured against the vest-day value as your cost basis.

Here's where paychecks get surprising. Employers usually cover the tax by selling or withholding a slice of the vesting shares at a flat federal withholding rate. IRS Publication 15 sets that rate at 22% for supplemental wages up to $1 million in a calendar year, rising to 37% on anything above that. The gap is easy to see once you write it down: if your income puts you in the 32%, 35%, or 37% bracket, your employer withheld 22% and the IRS expects the rest. A balance due builds quietly all year and surfaces at filing time, sometimes for tens of thousands of dollars. If your grants are large relative to salary, have your CPA project the gap and adjust estimated payments rather than discovering it in April.

One filing error shows up often enough to name. Brokerage tax forms sometimes report the cost basis of vested shares as zero, which makes it look like your entire sale is a gain being taxed again. The vest-day value was already taxed as wages; only growth beyond it is a capital gain. Correct the basis before filing, and keep your vest confirmations.

Should you sell RSUs when they vest?

The logic is easier to see with a swap. Once shares vest, holding them is the same decision as taking a cash bonus and spending every dollar of it on your company's stock. That equivalence is the frame the decision usually turns on. Selling at vest also adds little or no extra tax, because your basis is the vest-day price. Which path fits you depends on your concentration, your tax year, and the rest of your plan.

There are fair reasons to hold: trading windows, ownership guidelines for executives, or conviction in the company you help build. The tension is emotional as much as financial. Selling can feel disloyal, and everyone fears the double bind of selling right before a run-up or holding through a slide. No one can time that in either direction. What you can do is set a standing rule in advance, such as selling at vest or capping company stock at a ceiling you choose, so each vest date executes a decision instead of reopening one.

Concentration is the reason the rule exists. Your paycheck, your benefits, and your unvested grants already ride on this one company. Letting your investment account concentrate there too stacks every layer of your financial life on a single ticker.

When I build a plan around a vesting schedule, we decide three things up front: the ceiling for company stock as a share of your net worth, the default action on each vest date, and where the proceeds go next. Proceeds with a named destination, a tax reserve, a diversified account, next year's tuition, tend to actually arrive there.

What changes if your company is private?

Many private companies grant double-trigger RSUs, which need two things before shares are truly yours: your time-based vesting and a liquidity event such as an IPO or acquisition. Nothing is taxed until both happen. Then several years of vesting can land as income in a single year, often while trading restrictions still limit what you can sell. If you hold private-company RSUs, the planning question isn't just how much you'll receive; it's which tax year the pile arrives in, and what else you can move out of that year's income.

Common questions