RSUs are taxed as ordinary income when shares vest. Here’s how the vesting tax event, the 22% withholding gap, and capital gains treatment work for RSU recipients in 2026.
RSUs are taxed as ordinary income when shares vest — the vest-date fair market value appears on your W-2 regardless of whether you sell the shares. Employer flat withholding at 22% often falls short of higher marginal rates. Shares held more than 12 months after vesting qualify for long-term capital gains rates (0%, 15%, or 20%).
Receiving RSUs as part of your compensation looks simple until tax season arrives. The vesting schedule is straightforward, but the tax treatment involves three separate events — grant, vesting, and sale — each with different implications. Understanding which event triggers income and how to manage the employer withholding gap can prevent a significant surprise at filing.
A restricted stock unit is an employer’s promise to deliver company shares after a condition is met — typically a time-based vesting schedule (for example, 25% vesting annually over four years) or performance targets. At grant, you hold a future right, not actual shares.
The IRS does not treat this as taxable income until shares are delivered. Per IRS Publication 525 (Taxable and Nontaxable Income), property received as compensation is included in gross income at its fair market value when transferred to you. For RSUs, the transfer happens at vesting — not at grant.
Three distinct tax moments:
The vest-date income appears in W-2 Box 1 (Wages) alongside your salary. It is subject to federal income tax at your ordinary marginal rate, Social Security tax (up to the annual wage base), Medicare tax (1.45%, plus 0.9% additional Medicare on wages above $200,000 for single filers), and applicable state income tax.
Your employer must withhold federal income tax on RSU income. Most companies apply supplemental wage withholding. Per IRS Publication 15 (Employer’s Tax Guide, Circular E), supplemental wages are withheld at a flat 22% federal rate — or 37% if your total supplemental wages for the year exceed $1 million.
The 22% flat rate is accurate only if your marginal federal rate is 22% or lower. RSU recipients in the 24%, 32%, 35%, or 37% brackets face a gap between what the employer withholds and the actual tax owed.
Example: 800 shares vest at $90 per share. RSU income: $72,000. At 22% withholding: $15,840 withheld. At a 32% marginal rate: $23,040 owed. Gap: $7,200 due at filing — plus potential underpayment interest if quarterly estimated payments weren’t made during the year.
Two ways to close the gap:
1. Adjust Form W-4. Add a flat dollar amount of extra withholding each pay period after a vest event. The IRS Tax Withholding Estimator calculates how much to add. For instructions on completing the form, see how to adjust your W-4 withholding.
2. Pay quarterly estimated taxes. Make a direct estimated payment after any large vest event using IRS Form 1040-ES. See how to pay quarterly estimated taxes for amounts and quarterly due dates.
Once shares vest, your cost basis equals the vest-date FMV — the same number included in your W-2 wages. From that point, any gain or loss on sale is a capital gain or loss.
Per IRS Topic No. 409 (Capital Gains and Losses), the rate depends on how long you hold shares after the vest date:
Short-term (held 12 months or less after vesting): Gain taxed at your ordinary income rate — the same bracket as your W-2 wages.
Long-term (held more than 12 months after vesting): Gain taxed at preferential rates:
| Rate | Single filer | Married filing jointly | |---|---|---| | 0% | Taxable income up to ~$48,350 | Up to ~$96,700 | | 15% | ~$48,350 to ~$533,400 | ~$96,700 to ~$600,050 | | 20% | Above ~$533,400 | Above ~$600,050 |
Thresholds are adjusted for inflation annually. For current figures, see IRS Topic No. 409.
Holding shares 13 months instead of 11 months after vesting can reduce the tax rate on any appreciation by 10 to 22 percentage points. High earners may also owe the 3.8% Net Investment Income Tax when modified AGI exceeds $200,000 (single) or $250,000 (MFJ).
The 12-month clock starts at the vest date — not the grant date. Shares from a grant made three years ago that vest today begin their holding period today.
Many employees sell shares immediately at vesting — all shares, or enough to cover the withholding (“sell-to-cover”). In a same-day sale:
This eliminates single-stock concentration risk and simplifies your tax return. The trade-off: any post-vesting appreciation goes uncaptured.
If shares fall below your vest-date price and you later sell, the loss is a capital loss. Capital losses offset capital gains dollar-for-dollar, and up to $3,000 of net capital loss can offset ordinary income per year. For strategies around managing equity positions that have declined, see tax-loss harvesting to offset capital gains.
A common misconception: employees try to file an 83(b) election on RSU grants to lock in taxable income at the low grant-date price rather than the higher vest-date price. This does not work.
The 83(b) election was designed for restricted stock — actual shares transferred to you at grant subject to a forfeiture condition. It allows you to recognize ordinary income at the current (lower) value instead of waiting until restrictions lapse.
RSUs are not a transfer of property at grant. They are a contractual promise to deliver shares at a future date. Because no property is transferred at grant, there is nothing to make an election on. IRS Publication 525 requires the election to be filed within 30 days of a property transfer — and no such transfer occurs at RSU grant. Filing one has no legal effect.
If your company issues actual restricted stock (not RSUs) at a low current price, the 83(b) election is worth evaluating. The distinction between restricted stock and RSUs matters significantly.
Your brokerage issues Form 1099-B when you sell RSU shares. Cost basis reporting is frequently incorrect — sometimes $0 — because brokers receive grant-date records rather than vest-date FMV data from your employer’s payroll system.
To verify cost basis on any RSU sale:
Reporting $0 cost basis on shares whose full value you already paid ordinary income tax on results in double taxation. Use Form 8949 and Schedule D to report the corrected basis. The IRS accepts taxpayer-corrected basis with adequate documentation.
| Event | Tax treatment | |---|---| | RSU grant | No tax | | Shares vest | Ordinary income (vest-date FMV on W-2) | | Sale within 12 months of vesting | Short-term capital gain/loss (ordinary rates) | | Sale after 12 months of vesting | Long-term capital gain/loss (0%, 15%, or 20%) | | Same-day sale at vest | All ordinary income, minimal capital event |
This article is educational. Consult a tax professional for guidance specific to your situation.
At vesting. The taxable event is when shares are delivered to you — not the grant date and not the sale date. The fair market value on the vest date is ordinary income, added to your W-2 wages for that year.
The fair market value of vested RSU shares is added to W-2 Box 1 (Wages). If 500 shares vest at $40 per share, $20,000 is added to your W-2 income for that year alongside your regular salary.
Most employers apply the IRS flat supplemental wage withholding rate of 22% to RSU income (37% if supplemental wages exceed $1 million for the year). If your marginal tax rate is 32% or higher, the 22% withholding leaves a gap you will owe at filing.
More than 12 months after the vest date. The holding period starts on the day shares vest and are delivered — not the grant date. Shares sold more than one year after vesting qualify for 0%, 15%, or 20% long-term capital gains rates depending on your income.
No. The 83(b) election applies only to actual shares of restricted stock transferred at grant with a forfeiture condition. RSUs are a promise to deliver shares in the future — no property is transferred at grant — so the election is not available for RSUs.