The short version
When your RSUs vest, the full value of those shares counts as ordinary income that year, just like salary. It lands on your W-2 and is taxed at your regular rates.
Your employer usually holds back or sells some of the shares to cover taxes, but that default withholding is often less than your true tax rate. That gap is why a big vesting year can leave you owing more in April. After vesting, any further gain or loss when you sell is a separate capital gain or loss.
What an RSU actually is
A restricted stock unit, or RSU, is a promise from your employer to give you shares once you meet a vesting condition, usually staying for a period of time, and sometimes a liquidity event on top of that. You do not buy anything and there is no strike price, which makes RSUs simpler than options in one important way: there is nothing to exercise and no decision to time.
Because you receive the shares for no cost, the tax system treats their full value as compensation when they land in your hands.
The taxable moment is vesting
For most RSUs, the taxable event is vesting (technically, when the shares are delivered to you, which for many plans is the same time). On that date, the fair market value of the shares is treated as ordinary compensation income:
Ordinary income at vesting = share price on the vesting date × number of shares that vested
That amount is added to your wages and shows up on your W-2. It is taxed at your ordinary income rates, the same brackets as your salary, not the lower long-term capital gains rates. You owe this whether or not you sell a single share.
Some companies with double-trigger RSUs (common at startups) only vest the shares once the company also has a liquidity event, like an IPO. When that trigger hits, a large block can become taxable all at once, which is exactly when the withholding gap below tends to bite hardest.
Why withholding often falls short
To cover the tax, employers usually withhold by holding back a portion of the vesting shares, often called sell-to-cover or net settlement. The problem is the rate. Equity income is typically withheld at the flat federal supplemental wage rate, which is 22% on the first $1 million of supplemental wages in a year (and 37% on anything above $1 million). For a high earner whose real marginal rate is 32%, 35%, or 37%, that 22% default can fall well short. If your true rate is higher than what was withheld, the gap becomes a balance due when you file.
A quick illustration: if $200,000 of RSUs vest and are withheld at 22% ($44,000) but your marginal rate is really 35%, you are roughly $26,000 short on those shares alone, before state tax. Multiply that across a big vesting year and the surprise gets large fast.
State withholding can lag in the same way. The result is a common and unwelcome surprise: a strong vesting year that quietly creates an underpayment, sometimes large enough to trigger estimated-tax penalties on top of the tax itself.
This is preventable. Knowing the gap exists, you can set aside cash, make an estimated payment, or adjust withholding before the bill arrives instead of after.
After vesting, you own shares
Once RSUs vest and the income is taxed, you simply own stock. Your cost basis in those shares is the value that was already taxed at vesting. Your holding period for capital gains also starts at vesting.
If you sell later for more, the additional gain is a capital gain (long-term if you held more than a year, otherwise short-term). If you sell for less, you have a capital loss. The key idea: the vesting value was already taxed as income, so only the change after vesting is a capital gain or loss.
Where this trips people up
Assuming the withholding covered it
The most common RSU surprise. Default withholding is often below your real rate, so a big vesting year can leave a balance due, sometimes with an underpayment penalty. Check the gap and plan for it.
Paying tax twice by mishandling basis
Your basis in vested shares is the value already taxed at vesting. Brokerages sometimes report a basis of zero, and if you do not correct it you can pay tax a second time on income you already reported. Check the cost basis on your 1099-B.
Holding a concentrated position by default
After vesting you own company stock outright. Whether to keep it is a personal risk decision, not a tax one, but a single large position is worth being intentional about rather than holding it just because selling feels like a tax event.
Forgetting state tax and relocation
RSU income is generally sourced to where you earned it, and a move (say, Bay Area to Bend) around a big vest can create multi-state questions. Worth sorting out before the vest, not after.
Expecting to file an 83(b) on RSUs
An 83(b) election generally does not apply to ordinary RSUs, because you do not receive the stock at grant. That tool is for restricted stock and certain early-exercised options instead.
RSU tax questions people ask
When are RSUs taxed?
At vesting. The full value of the shares that vest is ordinary income that year, reported on your W-2. At a private company with double-trigger RSUs, that moment is usually the liquidity event rather than the time-based vesting date.
Why was my withholding not enough?
RSU income is typically withheld at the flat 22% supplemental rate (37% above $1 million). For higher earners that is often below your real marginal rate, so the shortfall shows up as a balance due unless you plan for it.
Do I get taxed twice on RSUs?
You should not, if the basis is handled correctly. The value at vesting is taxed as income; after that, only the change in price is a capital gain or loss when you sell. The common error is a 1099-B that omits the already-taxed basis, so it is worth checking.
Should I sell my RSUs as they vest?
Selling at vesting usually creates little or no additional tax, since you are taxed on that value either way, so many people sell to diversify out of a concentrated position. Whether that is right for you is more a personal finance question than a tax one.
What is my cost basis in vested RSUs?
The value per share at vesting, the same amount already included as income on your W-2. Future gain or loss is measured from there.
Can I make an 83(b) election on RSUs?
Generally no for standard RSUs, because no shares are actually transferred to you at grant. The 83(b) election applies to restricted stock and certain early-exercised options instead.
Keep reading
ISOs and AMT
If you also hold incentive stock options, the tax story is very different, and AMT can be involved. →
NSOs vs ISOs
Have options alongside your RSUs? Here is how the two option types are taxed. →
The 83(b) election
Restricted stock rather than RSUs? The 30-day election may matter. →
All resources
Browse every equity-comp explainer in one place. →
Sorting out a big vesting year?
Getting ahead of the withholding gap, the estimated taxes, and the basis details is exactly the kind of work I do with clients. If you have a large vest or an IPO coming, I am happy to help you plan the cash and the tax before it is due. Here is how to start a conversation.
Become a ClientThis article is general information, not tax or legal advice for your specific situation. Tax outcomes depend on your individual facts, and the rules change over time. Talk to a qualified professional (I am happy to be that person) before acting on anything here. Reading this page does not create a client relationship.