How Are RSUs Taxed?

RSUs are generally taxed as ordinary wage income when they vest, and any later price change is taxed separately as a capital gain or loss. A restricted stock unit, or RSU, is a company's promise to deliver shares in the future once stated conditions are met. Those conditions often include remaining employed through a vesting date, though plans can include other requirements. For most employees, the taxable event occurs when the RSUs vest and the shares are delivered or otherwise made available. The fair market value of the vested shares is generally treated as employment income. The IRS explains that RSU income is commonly reported on Form W-2 at the fair market value on the vesting date, with the amount included in wage income. It may appear in Boxes 1, 3, and 5, and employers may identify the amount as RSU income in Box 14. IRS guidance on stock-based compensation

Receiving RSUs is not usually taxable on the grant date. The value matters when the restrictions lapse and the units vest.

What happens at vesting

At vesting, the value of the shares is added to taxable wages. That can affect federal income tax withholding, Social Security and Medicare withholding where applicable, state and local income taxes, and the employee's total taxable income for the year.

A simple hypothetical example

Assume 200 RSUs vest when the company's stock is worth $50 per share.

• Number of shares vested: 200
• Share value at vesting: $50
• Taxable wage income: $10,000

The $10,000 is generally treated as compensation, much like salary or a cash bonus. Even if the employee keeps every share and sells nothing, the vesting event can still create taxable income. That is why an employee may see fewer shares deposited into their brokerage account than the number that vested. Many employers use share withholding or a sell-to-cover approach, retaining or selling some shares to help satisfy required tax withholding.

This withholding matters because it is often calculated as a flat supplemental rate rather than the employee's actual marginal tax rate. If an employee's income places them in a higher bracket once the vested value is added, the automatic withholding taken at vesting may fall short of the amount ultimately owed. Employees with large vesting events or significant other income may need to set aside additional funds or adjust withholding elsewhere to avoid an unexpected balance at tax time.

The second tax event: selling the shares

Once RSUs vest, the shares generally take a tax basis equal to their fair market value at vesting. The employee may have a capital gain or loss when they eventually sell.

Using the earlier example, the 200 shares had a total value of $10,000 at vesting. That value becomes the starting point for measuring a later gain or loss. If the shares later sell for $12,000, the additional $2,000 may be a capital gain. If they sell for $8,000, the $2,000 decline may be a capital loss.

The holding period after vesting also matters. Shares sold within one year of vesting are generally subject to short-term capital gains rates, which match ordinary income tax rates. Shares held for more than one year after vesting may qualify for lower long-term capital gains rates. This is a separate clock from the vesting date itself, so employees who plan to sell should track exactly when the one-year mark falls.

This two-step structure helps prevent the same value from being taxed twice. The vesting value is included as compensation, while only the price movement after vesting is measured for capital-gains purposes.

Why holding shares can create risk

Holding vested RSU shares means keeping part of your compensation tied to one company's stock price. The stock could rise, creating a gain, or it could fall, leaving the employee with taxable wage income based on the higher vesting value even though the shares are worth less later. For example, if shares worth $10,000 at vesting fall to $6,000 before sale, the employee still had $10,000 of wage income at vesting. The later $4,000 loss is a separate tax matter from the original compensation income.

Before deciding whether to sell, hold, or sell only enough shares to cover taxes, employees may want to consider their overall financial plan, cash needs, risk tolerance, and existing exposure to employer stock.

How RSUs may appear on tax forms

Form W-2

The value of vested RSUs is generally included with wages on Form W-2. The IRS specifically notes that for nonresident aliens receiving RSUs, employers generally report the fair market value at vesting as wage income on Form W-2. IRS guidance on RSU W-2 reporting Employees should review their W-2 carefully rather than assuming their RSU income will appear in a separate document.

Brokerage records for later sales

If an employee sells vested shares, the brokerage generally reports the sale. Employees should keep their own records showing the vesting date, number of shares vested, fair market value on that date, shares withheld or sold for taxes, and the date and price of any later sale. Accurate records help distinguish wage income already reported on the W-2 from any gain or loss that arose after vesting.

Can employees defer tax on RSUs?

In limited circumstances, some employees of private corporations may be eligible to defer income taxation on certain qualified stock received through broad-based equity programs.

The IRS describes an election under Section 83(i) that can allow qualified employees of private corporations to defer income taxation for up to five years from the vesting date on qualified stock attributable to eligible RSUs or stock options. The election applies only when specific conditions are met; it is not a standard option for every RSU recipient or every employer. IRS Publication 525

Because eligibility, deadlines, and potential consequences can be complex, employees considering a deferral election should seek advice from a qualified tax professional before taking action.

A practical RSU tax checklist

1. Read the plan documents to confirm the vesting date, settlement method, and withholding process.
2. Save vesting records, including share count and market value on the vesting date.
3. Review withholding against your likely overall tax situation, since flat-rate withholding may not match your final bill.
4. Check your W-2 to confirm RSU wage income is properly included.
5. Track later sales with brokerage confirmations and cost-basis details, noting the one-year mark for long-term capital gains.
6. Plan before selling, weighing taxes alongside the risk of concentrating too much wealth in employer stock.

The bottom line

Keep records for both tax events, review your withholding against your actual bracket, and get individualized tax advice when the award is large, the employer is private, or your work situation crosses state or national borders.

Informational note: This article is provided for general informational purposes only and is not legal advice. It does not represent the advice or opinion of the website or organization on which it appears.