How Are RSUs Taxed When They Vest?
RSUs are taxed as ordinary income the moment they vest, based on fair market value that day. Here's what shows up on your W-2, how withholding works, and what happens when you sell.
Restricted stock units (RSUs) feel straightforward until vest day. You didn't write a check to buy anything, but the IRS treats the shares you receive as compensation — not a gift, not a capital gain waiting to happen.
On the date your RSUs vest, you owe ordinary income tax on the full fair market value of the shares. Your employer will usually withhold federal and state taxes automatically, often by selling a portion of your shares to cover the bill. What lands in your brokerage account is the net after withholding.
The tax story doesn't end at vest. If you hold the shares and sell later, any change in price from vest date to sale date is a separate capital gain or loss. Getting both pieces right keeps you from double-counting income or missing a deduction.
Vest day is a W-2 event
When RSUs vest, the shares (or their cash equivalent) become yours. The IRS counts the fair market value on that date as wages, subject to ordinary income tax rates — the same brackets that apply to your salary.
Your employer reports this on Box 1 of your W-2. You'll also typically see it in Box 14 or supplemental pay sections, depending on how payroll codes RSU income. Social Security and Medicare taxes apply too, up to the wage base limits for FICA.
There is no special RSU rate. A $50,000 vest at a 32% marginal federal rate means roughly $16,000 in federal income tax before state taxes, plus FICA. The exact number depends on your total year-to-date income and whether the vest pushes you into a higher bracket.
How employers withhold on RSU income
Most public companies use supplemental wage withholding for RSU vests. Under IRS rules, employers can withhold at a flat 22% for supplemental wages up to $1 million in a calendar year, and 37% above that threshold.
That 22% rate is not your actual tax rate — it's a default. If you're in the 32% or 35% bracket, 22% withholding will leave you short. Many employees owe additional tax when they file, which is why RSU vests often trigger surprise tax bills.
Some employers let you elect a higher withholding rate or pay estimated taxes quarterly. Selling shares immediately at vest (a 'sell to cover' or 'sell all' election) is common precisely because it converts shares to cash for the tax bill.
Cost basis starts at vest FMV
Your cost basis in RSU shares equals the fair market value on the vest date — the same amount already taxed as wages. Keep your vest confirmation or 1099-B from the broker; that FMV is your starting point for capital gains math.
If you sell the same day you vest, your capital gain or loss is usually small (just the difference between vest price and sale price, minus any fees). If you hold for months or years, the gain or loss is measured from vest FMV to sale price.
Long-term capital gains rates (0%, 15%, or 20%) apply only if you hold the shares more than one year after vest. The income tax at vest is already locked in regardless of how long you hold afterward.
Double vesting in one year
RSU grants often vest on a quarterly or annual schedule. Multiple vests in one tax year stack on top of each other and your salary, which can push you into higher brackets or trigger phase-outs for credits and deductions.
Model your total RSU income before year-end if you have discretion over sell timing or charitable donations. A large Q4 vest might make bunching itemized deductions or increasing 401(k) contributions worth it.
If you relocate mid-year, state sourcing rules may split RSU income between states based on where you worked when each tranche vested — not where you live on vest day alone.
What to watch on your tax return
Compare your W-2 Box 1 to your pay stubs plus RSU vest confirmations. The vest FMV should appear in wages; if it doesn't, you still owe tax on the income and may need to report it manually.
Form 8949 and Schedule D capture sales of vested RSU shares. Use the vest-date FMV as cost basis — brokers sometimes report $0 basis if the transfer wasn't coded correctly, which overstates your gain.
If withholding fell short, pay the difference by April 15 or make estimated tax payments to avoid underpayment penalties. Safe harbor rules (paying 110% of prior year tax if AGI is high) can protect you even if you owe more at filing.
Key takeaways
- RSU vest FMV is ordinary income on vest day, reported on your W-2.
- Supplemental withholding (often 22%) may not cover your actual tax bracket.
- Cost basis for later sales equals the FMV already taxed at vest.
- Holding past vest creates a separate capital gain or loss on top of wage income.
This guide is for general education only and is not tax, legal, or accounting advice. Rules change, and your facts matter. Talk to a qualified professional before filing or making equity decisions.
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