RSUs get taxed twice, once at vesting and once at sale. The second tax bill is the one people forget is coming.
Say you vest 2,000 shares worth $150,000, hold them for 14 months while the stock climbs 40%. When you sell, you trigger capital gains on the 40% increase (on top of the tax you already paid when you vested).
Treating those as one event, or forgetting the second one entirely, is where most of the expensive mistakes happen.
How RSUs are taxed at vesting
When your restricted stock units vest, the IRS treats the full value of those shares as ordinary income and taxes it at your regular income tax rate.
The taxable amount is the fair market value of the shares on the vesting date, multiplied by the number of shares that vested.
Your employer is required to withhold tax on this income. They sell a portion of the vested shares (“sell-to-cover”) and send the proceeds from that sale to the IRS. They calculate how many shares to sell based on a flat supplemental wage rate rather than your actual tax rate.
This means that you might have overpaid or underpaid tax. Don’t assume the shares withheld automatically covered your full bill. Check against your actual bracket and run the numbers at tax time.
How are RSUs taxed when you sell?
Vesting isn’t the end of the tax story. Once your shares vest, your cost basis is set at the fair market value on that date (the same number used to calculate your ordinary income tax). So, if you vest 100 shares at a $100 fair market value, your cost basis is $10,000.
From that point forward, any change in value is a capital gain or loss.
If you sell the day your shares vest, there’s typically little or no capital gain to report, since the sale price and your cost basis are close to identical. If you hold the shares and the stock climbs, the difference between your sale price and the cost basis is what gets taxed as a capital gain.
Short-term vs. long-term capital gains on RSU shares
How long you hold the shares after vesting (not after your grant date, and not after the shares were originally awarded) determines which capital gains rate applies. It’s important to check your vesting date before you sell because it can have a significant impact on your tax bill.
| Holding period after vesting | Tax treatment | Typical rate |
|---|---|---|
| One year or less | Short-term capital gain | Taxed as ordinary income (your regular bracket) |
| More than one year | Long-term capital gain | 0%, 15%, or 20% federal, depending on income |
For example, a software architect at a mid-size healthtech company vests 2,000 shares worth $150,000. Fourteen months later, with the stock up 40%, she sells. That $60,000 gain is taxed at the long-term rate.
Had she sold earlier, at 11 months, the same $60,000 would have been taxed at her regular (and higher) income tax rate instead of the long-term rate. Selling before crossing the one-year mark can cost thousands of dollars more in tax.
See if you qualify for a way of diversifying your portfolio without a sale or tax bill.
Avoid these common RSU mistakes
The same few errors show up again and again in RSU tax planning:
Assuming withholding covered the full bill
The standard rate used by your company to calculate the withholding amount frequently falls short of what’s actually owed, leaving a balance due at tax time that catches people off guard.
How to avoid this mistake: Compare the withheld amount to your actual marginal bracket before tax season, and set aside cash for any shortfall.
Reporting the wrong cost basis
Brokerage 1099-B forms sometimes list a cost basis of $0, because the broker doesn’t have visibility into the income you already paid tax on at vesting. Using that $0 basis without correcting it means paying capital gains tax twice on the same value: once as ordinary income, once again as an inflated capital gain.
How to avoid this mistake: Pull your vesting-date fair market value from your equity plan statement and use it to correct any $0 basis your broker reports.
Not planning for a large, single tax event
A big vesting year can push you into a higher bracket than you expected, with consequences for quarterly estimated taxes, AMT exposure, and other income-dependent thresholds.
How to avoid this mistake: Talk to a tax professional ahead of a big vesting year so you can adjust quarterly estimated payments before the shortfall shows up.
Creating a concentrated position
If you hold onto vested shares instead of selling as they vest, years of grants can quietly turn into a concentrated position in a single stock. It happens gradually: a few thousand shares a quarter, reinvested rather than sold, until one company’s stock is making up more of your portfolio than you’re comfortable with.
How to avoid this mistake: Check what percentage of your net worth sits in one stock at least once a year, and look into diversification options before it becomes the biggest risk in your portfolio.
Exchange funds and RSUs
If you’ve ended up with a large, low-cost-basis position from years of vested RSUs, selling to diversify creates the same capital gains problem covered above, just at a larger scale.
An exchange fund is one alternative: you contribute your concentrated shares to a pooled fund in exchange for a diversified basket, and because the IRS treats the transaction as an exchange rather than a sale, no capital gains tax is due at the time you contribute.
Glidepath is a no-management-fee exchange fund that helps you diversify your concentrated position and defer tax until you’re ready to pay. Find out if you’re eligible to join the fund.
Frequently asked questions
How are my RSUs taxed?
RSUs are taxed as ordinary income at vesting, based on the fair market value of the shares on the vesting date. Any gain or loss from that point until you sell is taxed separately, as a short- or long-term capital gain depending on how long you hold the shares after vesting.
Are RSUs taxed as capital gains?
Not at vesting. Capital gains tax only applies to the change in value between vesting and sale.
What’s my cost basis on RSU shares?
The fair market value of the shares on the date they vested, not the price at grant, and not $0 (a distinction that matters because brokers don’t always report it correctly).