Are RSUs Taxed Twice?

So, are RSUs taxed twice?

The quick answer is no. RSUs are not taxed twice. Do not walk away yet, though, because the reason everyone thinks they are is the best part, and if you understand that, you understand the whole thing. If you want the full lifecycle first, grant through vesting to the sale, start here: how RSUs are taxed. Or estimate your bill with the RSU tax calculator.

When are RSUs actually taxed?

Your company comes to you and says: "Stick around for a year, and I'll hand you 100 shares of my company." Right now, that is just words. A promise. There are no shares in your hand. And the first neat thing is that the tax code agrees with your gut. Nothing has been given to you yet, so there is nothing to tax. The rule that taxes "property you get for doing your job" is IRC §83, and §83 only fires when actual property changes hands. A promise is not property. (This is also why you cannot do the famous "§83(b) election" on RSUs the way you can with real restricted stock: there is no property yet to make an election about. Tuck that away; it trips up smart people constantly.)

Now a year goes by, you stayed, and the company drops 100 shares in your palm. This is the moment everything happens. They are worth $50 each today, so $5,000 landed in your hand. And the government looks at that and says something very simple: "That's pay. That's no different from salary." So it gets taxed as ordinary income. That is §61(a)(1) ("gross income means compensation for services") working together with §83(a) (you got property, here is its value, it counts now). It shows up right on your W-2, mixed in with your regular wages. You got taxed once. On $5,000. Fair enough. It was income.

Here is the move almost nobody notices, and it is the key to the whole puzzle. Because you already paid tax on that $5,000, the government quietly staples a receipt to your shares that says: "Already accounted for: $5,000." That receipt has a name. It is your basis (§1012, cost basis, and the regulation under §83, Treas. Reg. §1.83-4(b), which says your basis is exactly the amount you already took into income). Remember that receipt. It is about to save your life.

Are RSUs taxed again when you sell?

Years pass. The shares do well. You sell them for $8,000.

Now, did you just make $8,000? Your gut might say yes. But you already owned $5,000 of that. That part was already yours, already taxed, paid for. The only new thing handed to you is the growth. The extra $3,000. So that is all you get taxed on. Selling is governed by §1001 (your gain is what you sold it for minus your basis), so it is $8,000 minus $5,000 = $3,000, taxed at capital-gains rates under §1(h). And if you held the shares more than a year after they landed in your hand, it is the lower long-term rate (§1222 defines that one-year holding period, which starts ticking at vesting).

So count it up. You were taxed on $5,000 as pay, then $3,000 as growth. Five plus three is eight. Every single dollar got counted exactly once. You were taxed at two different moments, on two different things, but never twice on the same dollar. That is not double taxation. That is just taxation, in two acts.

Use that counting method every time, on any equity comp, and it will not let you down. Add up what you were taxed on. Compare it to what the shares were worth when you sold. If the first number is bigger than the second, something is wrong with the paperwork, not with the law. You do not need a formula to run that check. You need two numbers and a minute.

Why does everyone think RSUs are double taxed?

Because the receipt gets smudged. When you sell, your brokerage sends you and the IRS a Form 1099-B, and on a huge number of them, the cost basis is printed as $0. Why? Because after the 2014 basis-reporting rules, the broker is only permitted to report what you paid out of pocket for the shares, and for RSUs, you paid nothing. So the form literally says: "These shares cost this person zero dollars." Now the IRS computer looks at it and thinks you sold $8,000 worth of shares that fell from the sky for free, and it tries to tax the whole $8,000, including the $5,000 you already paid tax on back at vesting.

That is the RSU double tax. It is not the law doing it. It is the paperwork. The $5,000 got taxed twice only because the receipt got lost.

And the fix is just as concrete: on Form 8949, you correct the cost basis back to $5,000 and the phantom tax evaporates. The gain drops from a fake $8,000 to the real $3,000, flows down to your Schedule D, and the world is right again.

Are RSUs double taxed if I sold to cover?

This is the version of the question we get most often, and the answer needs two halves because it is two different worries wearing one sentence.

Selling to cover is not a second tax. Your employer sold some of your shares and sent the proceeds to the IRS as withholding. That is payment against the tax you already owed at vesting, exactly like the federal tax line on a paycheck. Nothing extra was charged.

But sell-to-cover is where the $0 basis bites hardest, because the shares sold are sold the same day they vested. There is no real gain on them at all. If that sale went onto your return straight off the 1099-B with a $0 basis, you were taxed a second time on money that never grew by a dollar. Same-day sales are the purest form of this error, which is why they are the easiest ones to spot and the most worth checking.

Worth knowing separately: the withholding on that sale is usually the flat 22% supplemental rate, which is short for most people receiving meaningful equity. That is a different problem from double taxation, it has its own deadline, and it is covered in RSU estimated tax payments and the W-4 fix.

What if a past return already got it wrong?

That is the fix going forward. If it already went uncorrected on a return you filed in a previous year, the money is not gone. You generally have three years to amend and claim it back, and if you filed on extension your window runs later than April. Here is how to check a past return and recover the overpayment.

So the tax code did not do this to you. A receipt went missing and a computer believed the gap.

The receipt still exists. It is on the W-2 from the year the shares landed, in with your wages, saying what it always said. Already accounted for. Five thousand dollars, paid in full.