RSUs are taxed high because they’re not taxed as an investment gain when they vest. They’re taxed as ordinary income, the same rate that applies to your salary, at whatever your marginal bracket is that year.
For someone already earning a solid base salary, adding six figures of vested stock on top of it often pushes the whole stack of income into a higher bracket than the salary alone would have.
RSUs are taxed as ordinary income (not capital gains) when they vest
There’s no capital gains treatment at vesting, no matter how long you worked toward the grant or how the stock has performed since it was awarded. The IRS treats the value of the shares on their vesting date as W-2 wages.
If 1,000 shares vest at $200 each, that’s $200,000 of ordinary income added to your return for the year, regardless of what the grant was originally expected to be worth when it was issued.
Why that often pushes your total income into a higher bracket than expected
Ordinary income is taxed progressively: each additional dollar is taxed at the rate for the bracket it falls into, not your average rate across your whole income.
A large RSU vest doesn’t just get taxed at your current bracket. It stacks on top of your salary and can push a meaningful chunk of that vest into the next bracket up, or the one above that.
Someone earning $180,000 in salary with $150,000 of RSUs vesting in the same year is taxed on a combined $330,000, not on two separate incomes.
The salary portion is taxed the way it always would be, but the RSU income stacks on top of it: that $150,000 starts getting taxed right where the salary left off, climbing through each higher bracket in turn as the total rises to $330,000. Some of that RSU income likely lands in a bracket the salary alone would never have reached.
Are RSUs taxed high?
The ordinary-income hit only applies once, at vesting. From that point forward, the shares you now hold work like any other stock. If you hold them and they appreciate further, that additional gain is taxed at capital gains rates when you eventually sell. And if you hold for more than a year past vesting, they’re taxed at preferential, long-term rates.
This is the part that trips people up. The tax bill that feels so high isn’t a penalty for holding the stock. It’s ordinary income tax on compensation, and it would have applied at the same rate if your employer had just paid the equivalent in cash instead.
Why withholding often doesn’t match what you actually owe
What your employer withholds at vesting is a flat rate set for supplemental wages (not your actual bracket), so the amount withheld could land short of what you actually owe. How the supplemental rate works and why it undershoots for most tech employees is worth understanding in detail before your next vesting date.
Ways to manage the tax burden as your position grows
None of this is really avoidable at the point of vesting, since the ordinary-income treatment applies no matter what you do next. What is manageable is what happens to the shares afterward, especially once several years of vests have piled up into a real concentrated position in one company’s stock. Here are a few common approaches:
- Sell and diversify immediately, accepting capital gains tax on any appreciation since vesting in exchange for full liquidity and no more concentration risk.
- Contribute the position to an exchange fund, such as Glidepath, which lets you defer further tax while trading the stock for a diversified interest instead of an outright sale.
- Spread sales over several years to manage which bracket each year’s gains land in, rather than realizing everything at once.
Has your vested position grown large enough to be a real concentration risk? Find out if you can diversify and defer capital gains on your RSUs.