How are RSUs taxed?
Last updated August 2026
Short answer
RSUs are the simplest form of equity compensation to understand and the easiest to get wrong at tax time. Almost every problem traces back to one fact: the tax is triggered by vesting, not by selling.
Vesting is the taxable event
When RSUs vest, the shares become yours and the market value that day is treated as compensation. It is added to your W-2 wages and taxed at ordinary income rates, along with Social Security and Medicare.
This happens whether or not you sell. Doing nothing does not defer the tax; it simply means you owe tax on shares you still hold.
Grant is not a taxable event. Vesting is. So a four-year grant produces a taxable event on each vesting date, at whatever the price happens to be then.
Why the withholding is often too low
Most employers withhold on RSU vesting at the flat supplemental wage rate, which is 22% federally on amounts up to $1 million.
If your actual marginal rate is 32% or 35%, that leaves a shortfall of ten or more percentage points on the full vested value, and nobody flags it until you file.
On $100,000 of vesting income, a 22% withholding against a 35% marginal rate leaves roughly $13,000 owed in April. This is the single most common RSU surprise and it is entirely predictable in advance.
Sell to cover, and what it does not cover
Most plans automatically sell a portion of the vesting shares to fund the withholding, which is sell to cover. You receive the net shares.
The important point is that it covers the withholding, not necessarily your actual liability. If the flat rate under-withholds for your bracket, sell to cover leaves the gap in place.
Setting aside cash, or increasing withholding elsewhere, is the ordinary fix. Estimated payments are another, particularly if the vesting is large relative to your salary.
The second tax, when you sell
Your cost basis in the vested shares is the market value on the vesting date, the same amount already taxed as income.
Sell immediately at that price and there is essentially no gain, because you have already been taxed on the full value. Hold and sell later, and the difference between the sale price and the vesting price is a capital gain or loss.
The holding period for long-term treatment starts at vesting, not at grant. Selling within a year of vesting produces a short-term gain taxed at ordinary rates.
The double-counting error
The most expensive RSU mistake is reporting a cost basis of zero on your return.
Brokers frequently report the basis on a 1099-B as $0 or leave it blank, because the compensation element was reported by your employer rather than the broker. If you file that as-is, you pay ordinary income tax on the vesting value through your W-2 and capital gains tax on the same amount again.
The fix is to adjust the basis to the vesting-date value, which your plan statements show. Tax software prompts for it, but only if you notice.
Try it in Walnut
Walnut reads your connected brokerage positions, so you can see how large a vested employer stock position has become relative to everything else you hold.
Holding versus selling at vest
Selling at vest is tax-neutral: you have already paid income tax on the value and there is no gain to add.
Holding is a decision to make a new investment in your employer with post-tax money. It is worth asking whether you would buy that many shares of your own company at today's price if you were handed the cash instead.
Concentration is the real risk rather than the tax. Salary, bonus, benefits and a large equity position all depending on one company is a lot of exposure to a single outcome.
What to check each vesting cycle
The withholding rate applied against your actual marginal rate, and whether a shortfall is building.
The cost basis your broker will report, and whether it needs adjusting to the vesting value.
What proportion of your total net worth the accumulated shares now represent, which tends to creep up unnoticed across several vesting dates.
Sources
Equity compensation is covered in IRS Publication 525. Cost basis and 1099-B reporting are in IRS Publication 550. Walnut is informational and is not an investment adviser. This guide is educational and not personalized tax or investment advice; anything with a tax consequence is worth confirming with a tax professional.
FAQ
When are RSUs taxed?
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At vesting, not at grant and not at sale. The full market value of the shares on the vesting date is treated as ordinary income and added to your W-2 wages, whether or not you sell. Selling later creates a separate capital gain or loss on top.
Why do I owe more tax on RSUs than was withheld?
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Most employers withhold at the flat 22% supplemental wage rate. If your marginal rate is 32% or 35%, that under-withholds by ten or more percentage points on the full vested value, and the shortfall appears when you file. It is predictable and worth planning for.
Should I sell RSUs as soon as they vest?
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Selling at vest is tax-neutral, since you have already paid income tax on the full value and there is no gain. Holding is effectively a decision to buy that many shares of your employer with post-tax money, so the question is whether you would, and how concentrated you already are.