Are RSUs Taxable? How RSU Taxation Works

Restricted Stock Units (RSUs) are a common form of equity compensation, promising company stock shares delivered once specific conditions, typically time-based or performance-based, are met. Understanding the tax implications of RSUs is important, as they are a taxable form of compensation. This article details how RSUs are taxed at various stages and explains the associated reporting requirements.

Taxation at Vesting

The primary taxable event for Restricted Stock Units occurs at the point of vesting. Vesting signifies the moment when the restrictions on the RSU lift, and the employee gains full ownership of the shares. At this time, the fair market value (FMV) of the shares on the vesting date is considered taxable income to the employee. This value is treated as ordinary income, similar to regular wages or a cash bonus.

This ordinary income is subject to federal income tax, Federal Insurance Contributions Act (FICA) taxes (Social Security and Medicare), and potentially state and local income taxes. Social Security tax applies up to an annual wage cap, while Medicare tax applies to all earned income.

Employers typically withhold taxes when RSUs vest. A common method is “sell-to-cover,” where a portion of vested shares is automatically sold to generate funds for tax payments. For federal income tax, the statutory withholding rate for RSU income is often 22% for amounts up to $1 million, and 37% for amounts exceeding $1 million.

After a “sell-to-cover” transaction, the remaining shares are delivered to the employee. Another method involves cash withholding, where an employee pays the tax liability out of pocket to retain all vested shares. Some companies may also use a “net share settlement” method, where the company covers the tax payment and delivers fewer shares.

The fair market value of RSUs for tax purposes at vesting is determined by the stock’s price on the vesting date. This value is included as taxable ordinary income on the employee’s Wage and Tax Statement (Form W-2).

The amount withheld by the employer, particularly the statutory 22% rate, may not fully cover an individual’s total tax liability, potentially resulting in an unexpected tax bill. The holding period for capital gains tax purposes begins on the vesting date, which is also when shares become fully owned by the employee.

Taxation Upon Sale

A second taxable event occurs when shares acquired from vested RSUs are subsequently sold. This taxation relates to any appreciation or depreciation in the share value after the vesting date.

The cost basis for RSU shares is the fair market value of the shares on the vesting date, as this amount was already taxed as ordinary income. This prevents the same income from being taxed twice.

To calculate the capital gain or loss, the sale price of the shares is compared to their cost basis (the FMV at vesting). If the sale price is higher than the cost basis, a capital gain is realized; if it is lower, a capital loss occurs. This gain or loss is then subject to capital gains tax rules.

The tax rate applied to capital gains depends on how long the shares were held after vesting. Shares held for one year or less after vesting are subject to short-term capital gains tax rates, taxed at the same rates as ordinary income. Selling shares immediately after vesting may still result in a short-term capital gain if the stock price increases.

Conversely, shares held for more than one year after vesting are subject to long-term capital gains tax rates. These rates are typically lower than ordinary income tax rates, designed to encourage long-term investment. For many taxpayers, long-term capital gains rates are 0%, 15%, or 20%, depending on their income level. For instance, in 2025, individual filers with lower taxable incomes may pay 0% on long-term capital gains, while higher earners could face rates of 15% or 20%.

High-income individuals may also be subject to an additional 3.8% Net Investment Income Tax (NIIT) on certain investment income, including capital gains, if their modified adjusted gross income exceeds specific thresholds. This tax is applied in addition to the standard capital gains rates. Holding RSUs for over a year after vesting can be advantageous for tax purposes if the shares have appreciated, as it allows for the lower long-term capital gains rates to apply to the appreciation.

Understanding Your Tax Reporting

Individuals receiving RSU compensation will encounter specific tax documents that report these income and sale events. The ordinary income recognized at vesting, as discussed previously, will be reported on Form W-2, Wage and Tax Statement. This income is typically included in Box 1, “Wages, tips, other compensation,” which represents the total taxable income for the year. Employers may also report RSU income in Box 12, often with code “V,” or in Box 14, “Other information,” providing additional detail about the RSU compensation.

When vested RSU shares are subsequently sold, the transaction is reported on Form 1099-B, Proceeds From Broker and Barter Exchange Transactions. This form provides essential details for tax reporting, including the gross proceeds from the sale, the date the shares were acquired (which is the vesting date), and the cost basis of the shares. It is important to verify that the cost basis reported on Form 1099-B accurately reflects the fair market value of the shares on the vesting date to avoid overpaying taxes.

These tax forms are then used when preparing an individual’s annual income tax return. The sale of RSU shares, and any resulting capital gains or losses, must be reported on Form 8949, Sales and Other Dispositions of Capital Assets. This form lists the details of each sale, including the description of the property, dates of acquisition and sale, proceeds, and cost basis.

The totals from Form 8949 are then transferred to Schedule D, Capital Gains and Losses, where the net capital gain or loss for the year is calculated. This calculated net capital gain or loss from Schedule D then flows to the main Form 1040, U.S. Individual Income Tax Return, impacting the overall tax liability.

Key Tax Planning Considerations

Managing the tax implications of Restricted Stock Units requires careful planning and attention to detail. One important consideration is monitoring tax withholding to avoid underpayment penalties. Since the statutory withholding rate for RSU income (often 22%) may be lower than an individual’s marginal tax rate, a significant tax liability could arise at year-end. If the amount of tax paid through withholding and estimated payments does not meet certain thresholds (generally 90% of the current year’s tax liability or 100% of the prior year’s liability, or 110% for high-income earners), the IRS may impose penalties and interest. To mitigate this, individuals can adjust their W-4 withholding with their employer or make quarterly estimated tax payments.

Tax loss harvesting is another strategy that can be considered if RSU shares decline in value after vesting. This involves selling shares at a loss to offset capital gains from other investments or to offset up to $3,000 of ordinary income in a tax year. However, the “wash sale rule” must be observed, which disallows a loss if substantially identical securities are bought within 30 days before or after the sale. This rule applies to RSU shares as well.

Accurate record-keeping is important for RSU taxation. This includes maintaining records of vesting dates, the fair market value of shares on those dates, sale dates, and sale prices. These records are essential for correctly calculating cost basis and capital gains or losses when preparing tax returns. Without proper documentation, it can be challenging to substantiate reported figures to tax authorities.

Given the complexities involved, consulting with a qualified tax professional is often valuable for personalized advice. A tax professional can help individuals understand their specific RSU grant details, optimize withholding, navigate potential underpayment issues, and develop a comprehensive tax strategy tailored to their financial situation and goals. This proactive approach can help minimize tax liabilities and ensure compliance with tax regulations.