Restricted stock units are taxed at two moments — as ordinary income when they vest, then as capital gains on any growth when you sell — but never twice on the same dollar.
The life of an RSU: your company promises you shares for sticking around. So you do — and soon enough, et voilà, the shares land in your hands. It's nice; you own a piece of the company you helped build. But a lot of the time cash is better, so you decide to sell your stock units. Three things happened along the way, and only two of them were taxable. Let's go over it.
- Grant — nothing happens. Your company says "stay a year and you'll get 100 shares." Right now that's just a promise and some words. Can't tax words, so there's nothing to tax. The rule that taxes property you receive for your work, IRC §83, only fires when real property changes hands — which is why you can't make the famous §83(b) election on RSUs the way you can with real restricted stock. There's no property to elect it on. Smart people trip on this constantly.
- Vesting — the first taxable event. A year passes; congratulations on your first work anniversary. Here are the shares they promised you — they're yours now. The government looks at their fair market value that day and calls it exactly what it is: pay. So it's taxed, and it's taxed as ordinary income, right on your W-2, mixed in with your salary.
- Selling — taxed only on the growth. Whenever you sell, you're taxed only on what the shares gained after vesting, at capital-gains rates. Recall it was already taxed at fair market value in step 2, so any gain on top of that is taxed, and any loss below it is a capital loss for your account to apply.
Vesting is the main event
The day your RSUs vest, the fair market value of those shares becomes ordinary income. If 100 shares vest at $50, that's $5,000 of wages to you — the same as if your employer had handed you a $5,000 bonus. This is §61(a)(1) ("gross income means compensation for services") working with §83(a) (you received property; here's its value; it counts now), firing precisely at vesting because the shares are finally property transferred to you and no longer at risk of forfeiture. It lands on your W-2 and it's taxed like the wages it is: federal income tax, Social Security, and Medicare all apply.
Two separate things are quietly happening at vesting. First, that $5,000 becomes your cost basis — and it's the very same §83 that does it: Treas. Reg. §1.83-4(b) sets your basis at exactly the amount you just took into income (on top of the $0 you paid out of pocket), which §1012 then treats as your cost. Think of it as a receipt stapled to the shares saying "already taxed: $5,000." Hold onto that idea; it's what keeps you from being taxed twice when you sell. Second, your holding period starts ticking now, at vesting — not at grant. That clock decides whether your future sale is taxed at the low rate or the high one.
The withholding trap — the part that actually costs people money
Here's the surprise that actually costs people money: the tax your employer withholds when your RSUs vest usually isn't enough. They withhold by selling off a chunk of the shares ("sell to cover"), which feels like it's handled — but it often falls short of what you'll really owe.
By default, employers withhold federal income tax on RSU vesting at the flat 22% supplemental-wage rate (it jumps to 37% only on supplemental pay above $1 million in a year). That's fine — but only if 22% is your tax rate. Again, it usually isn't. Most equity-comp employees are in the 32%, 35%, or 37% bracket. So the company withholds 22%, your real rate is 35%, and that delta doesn't disappear — instead it becomes a bill you owe when you file, often with an underpayment penalty stapled on top for good measure.
On a $200,000 vest, 22% withholding covers $44,000. If your real marginal rate is 35%, the tax is $70,000. That's a $26,000 shortfall waiting for you in April — on income you already "paid tax on."
The fix isn't complicated, but it has to be done before the bill lands: make a quarterly estimated tax payment to close the gap, ask payroll to withhold extra, or set the money aside deliberately. This one item is why most people with meaningful RSUs should be running the numbers the year the shares vest, not the following April. Run your own numbers with our free RSU tax calculator.
How short does 22% fall? We ran the numbers.
Every article about RSUs tells you 22% withholding usually isn't enough. Almost none of them tell you by how much. So we took the bracket math behind our own calculator and pushed it through 145 scenarios per filing status: base wages from $120,000 to $400,000 in $10,000 steps, against vests of $25,000, $50,000, $100,000, $150,000 and $200,000.
For a single filer, 22% came up short in all 145. Not most of them. All of them.
| Base wages | $50,000 vest | $100,000 vest | $200,000 vest |
|---|---|---|---|
| $150,000 | $1,000 | $4,570 | $16,900 |
| $200,000 | $3,570 | $9,400 | $22,400 |
| $250,000 | $5,830 | $12,330 | $25,330 |
| $300,000 | $6,500 | $13,000 | $26,000 |
On a $100,000 vest, a single filer's true federal tax on that income averages 32.4% against the 22% withheld. Average shortfall: $10,430. The smallest gap anywhere in the range was still $2,134.
Married filing jointly is gentler, because the same income sits lower in a joint bracket. 22% still fell short in 123 of the 145 runs. Below roughly $140,000 of base wages a couple can break even or come out slightly over-withheld, and the gap widens from there as wages climb.
The more useful number is where it turns. A single filer with a $100,000 vest is already under-withheld once base wages pass roughly $60,000. That is well below where most people assume the problem starts. If you are waiting to earn serious equity-comp money before checking, you are already past the line.
None of this is exotic math. It is arithmetic nobody runs until April. Running it in the year the shares vest is a standard part of what an Enrolled Agent does on an equity-comp return, alongside correcting the $0 cost basis on your 1099-B and sizing the estimated payments that keep an underpayment penalty off the bill.
Method: 145 scenarios per filing status, single and married filing jointly. Base wages $120,000 to $400,000 in $10,000 increments, against vests of $25,000, $50,000, $100,000, $150,000 and $200,000. Federal income tax only, 2026 brackets and standard deduction, comparing the marginal federal tax on the vested amount against flat 22% supplemental withholding. FICA, state and city tax excluded. Same calculation engine as the RSU tax calculator, so any row here can be reproduced.
Selling: only the growth is taxed
When you finally sell, you're taxed only on what the shares gained since vesting — not the whole sale price. Say they do well and you sell for $8,000. Did you make $8,000? No — you already owned $5,000 of that, taxed at vesting. The only new thing is the $3,000 of growth, and that's all you're taxed on. Selling is governed by §1001: your gain is the sale price minus your basis. $8,000 − $5,000 = $3,000.
What rate that $3,000 gets taxed at comes down to the clock that started at vesting. Held the shares more than a year after they vested? It's a long-term capital gain at the lower rates under §1(h) (the one-year period is defined in §1222). Sold within a year of vesting? It's a short-term gain, taxed at your ordinary rate — the same high rate as your wages. That single decision, hold twelve months or don't, can be the difference between a 15–20% rate and a 37% one.
And this is exactly where the "RSUs are taxed twice" myth is born: your broker often reports your cost basis as $0 on Form 1099-B, which makes the IRS think your whole $8,000 sale was profit. It isn't — you fix the basis on Form 8949 and the phantom tax evaporates. We wrote the full walkthrough here: Are RSUs taxed twice?
Private-company RSUs vest differently (double-trigger)
If your company is still private — a startup, pre-IPO — your RSUs usually carry a double trigger. They don't vest on time alone. Two things have to happen: you have to put in the time and the company has to have a liquidity event, like going public or getting acquired. Until both happen, there's no income and no tax, even if you've "worked the years."
The catch: when the liquidity event finally hits, years of vesting can land as ordinary income all at once, often in the same year you can finally sell. That's a large, lumpy tax bill in a single year, and it makes the withholding gap above far more dangerous. If you hold private-company RSUs and an IPO is on the horizon, that's a conversation to have before the event, not after.
Private-company RSUs have enough moving parts — §409A timing, the double-trigger mechanics, pre-IPO planning — to deserve their own deep dive. We're writing it: How Private-Company (Double-Trigger) RSUs Are Taxed — link coming when it's live.
Putting it together
Granted: nothing. Vested: taxed as ordinary income on the value that day (watch the withholding gap). Sold: taxed only on the growth — long-term if you held a year past vesting, short-term if you didn't. Two taxable moments, two different things, every dollar counted exactly once.
State and City taxes: New York State & New York City
RSU taxes don't stop at federal. Consider that RSUs are wages, so wherever you owe income tax on your paycheck, you owe it on your vested shares too. And one state, New York, has a rule that surprises people years after they've moved away.
New York taxes vested RSUs as wages
Live or work in New York when your RSUs vest, and New York taxes that income like your salary — at your marginal state rate. A New York City resident pays city tax on top of that. Straightforward. It's the next rule that catches people off guard.
The move-away trap: New York allocation
Here's the one almost nobody warns you about. RSUs are pay for work you did across the whole grant-to-vest period. New York taxes the slice of that income you earned while working in New York, even after you've moved out of New York! Vest two years after leaving? New York still taxes the portion tied to the days you worked in New York during the vesting period, allocated by those workdays.
So people who move to Texas or Florida, watching their RSUs vest, are shocked when they get a bill from New York. If you earned equity in New York and left, this is the number to get right. Why you want to hire someone that won't miss it.
New York City
New York, New York. The name so nice, they named it twice and which you have to pay it twice, usually. NYC layers its own resident income tax on your RSUs; up to 3.876%, on top of state and federal. It hits residents only: work in the city but live outside it and you skip the city tax, though the state allocation rule above still follows you. For a NYC resident, the combined federal, state, and city bite on a vesting event runs well past the flat 22% your employer withheld.
Getting RSUs right across state lines is where the money is saved.
See if we're a fit →Forms referenced in this article
- Form W-2
- Your RSU value at vesting shows up here as wages — with tax already withheld (often not enough).
- Form 1040-ES
- How you make the quarterly estimated payment that closes the 22%-vs-real-rate gap.
- Form 1099-B
- Your brokerage's report of the sale — check the cost basis; it's often wrongly $0.
- Form 8949
- Where you correct the cost basis so you're not taxed on the vesting value twice.
- Schedule D
- Where your corrected capital gain or loss is totaled.
Frequently asked questions
How are RSUs taxed?
RSUs are taxed at two points. First, when they vest, their fair market value is ordinary income reported on your W-2 (IRC §61 and §83). Second, when you sell, only the growth after vesting is taxed as a capital gain (§1001) — long-term if you held more than a year after vesting, otherwise short-term. They aren't taxed at grant, because a promise isn't property.
Is enough tax withheld when RSUs vest?
Usually not. Employers withhold federal income tax on RSU vesting at the flat 22% supplemental-wage rate (37% above $1 million). Many equity-comp employees are in the 32–37% brackets, so 22% leaves a shortfall that comes due at filing — sometimes with an underpayment penalty. Close it with quarterly estimated payments or extra withholding in the year the shares vest. Which of those two you use matters more than most people realise: the September 15 deadline and the W-4 fix.
Are RSUs taxed at grant or at vesting?
At vesting, not at grant. At grant an RSU is only a promise, which isn't property, so there's nothing to tax and no §83(b) election is available. Tax applies when the shares actually vest and their value becomes ordinary income.
What is my cost basis for RSUs?
Your cost basis is the fair market value of the shares on the day they vested — the same amount already taxed as ordinary income on your W-2 (Treas. Reg. §1.83-4(b)). If your Form 1099-B shows a $0 basis, correct it on Form 8949 so you aren't taxed twice.
What is the tax rate when I sell RSUs?
You're taxed only on the growth after vesting. Held the shares more than a year after they vested? That growth is a long-term capital gain at the lower rates under §1(h). Sold within a year? It's a short-term gain taxed at your ordinary income rate.
Are RSUs included on your W-2?
Yes. The fair market value of the shares on the day they vest is reported as wages in Box 1 of your W-2, with the tax withheld showing up in Boxes 2, 4 and 6. It is folded into your total wages rather than listed on its own line, which is why your W-2 can read far higher than your salary. Many employers also note the amount in Box 14, but that box is informational and the label varies by employer.
Do RSUs count as income?
Yes, as ordinary income, in the year they vest. Not in the year they were granted, and not in the year you sell. Vested RSUs are wages under §61 and §83, so they count toward your tax bracket, toward Social Security and Medicare, and toward anything else that keys off your income for the year, including phase-out thresholds you might not expect to cross.
Are RSUs taxed as ordinary income or as capital gains?
Both, at different moments, on different amounts. The value at vesting is ordinary income at your regular rates. Anything the shares gain after that is a capital gain when you sell, long-term if you held them more than a year past vesting. The vesting value itself is never taxed again as a gain, because it becomes your cost basis.
Do you pay taxes on RSUs if you never sell the shares?
Yes. The tax at vesting is not triggered by selling. You owe ordinary income tax on the full vested value whether you sell immediately, hold for a decade, or watch the price fall afterward. That last case is the one that hurts: the tax was locked in at the vesting-day value, and a later decline becomes a separate capital loss rather than a refund.
Do RSUs get taxed twice?
No. They are taxed at two points in their life, but never twice on the same dollar. The vesting value is taxed as income and then becomes your cost basis, so only growth above it is taxed again at sale. The reason people believe otherwise is a $0 cost basis printed on Form 1099-B, which really would tax the same money twice if you filed it as-is. Here is the full explanation and the fix.
How are RSUs taxed at a private company before IPO?
Most private-company RSUs are double-trigger: they require both time-based vesting and a liquidity event such as an IPO or acquisition. No tax is due until both are met. When the liquidity event occurs, years of vested value can become ordinary income all at once, creating a large single-year tax bill.
Have RSUs vesting this year? The withholding is almost never enough, and the fix has a deadline. We help equity-comp employees get the timing, the estimated payments, and the cost basis right — before April turns it into a surprise. In the Metroplex, that often means employees of the Cypress Waters headquarters — see tax preparation in Coppell.
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