Are RSUs Taxed Twice?

So, are RSUs taxed twice?

The quick answer is no. RSUs aren't taxed twice. But hold on, don't walk away yet, because the reason everyone thinks they are is the best part, and if you understand that, you understand the whole thing. And if you want the full lifecycle first — grant, vesting, and the sale — start here: how RSUs are taxed. Or estimate your bill with the RSU tax calculator.

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's just words. A promise. There are no shares in your hand. And here's the first neat thing: the tax code agrees with your gut. Nothing has been given to you yet, so there's 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 isn't property. (This is also why you can't do the famous "§83(b) election" on RSUs the way you can with real restricted stock: there's 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're 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's §61(a)(1) ("gross income means compensation for services") working together with §83(a) (you got property, here's 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's the move almost nobody notices, and it's 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's 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's about to save your life.

So 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's all you get taxed on. Selling is governed by §1001 (your gain = what you sold it for minus your basis), so it's $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's 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's not double taxation. That's just taxation, in two acts.

So 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 allowed 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's the double tax. It's not the law doing it. It's 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.