RSU Tax Implications: From Vesting to Selling
Learn the tax implications of your equity compensation. Understand how your shares are treated as both income and as an investment for tax purposes.
Restricted Stock Units (RSUs) are a form of employee compensation consisting of company stock. This equity is granted with conditions, most commonly a time-based service requirement. An employee receives a grant of RSUs but does not own the shares until they have met the specific vesting criteria outlined by the company. Once the conditions are met, the employee takes ownership of the shares, which have a monetary value tied to the company’s stock price.
The RSU Lifecycle and Key Tax Events
The RSU lifecycle begins on the grant date. This is when your company promises you a specific number of shares in the future, provided you meet certain conditions. The grant date is a non-event for tax purposes; since you have not yet received the shares and they are subject to forfeiture, no income is recognized, and no tax is owed.
The vesting date is the first taxable event in the RSU lifecycle. This is when you satisfy your employer’s requirements and gain full ownership of the shares. On this day, the fair market value of the vested shares is considered ordinary compensation income and is subject to federal, state, local, and Social Security and Medicare (FICA) taxes.
The final stage is the sale date, which creates a second taxable event. When you decide to sell your shares, the transaction can result in a capital gain or a capital loss. The tax treatment of this outcome depends on how long you held the shares after they vested.
Calculating and Paying the Tax at Vesting
The taxable income from your vested RSUs is calculated by multiplying the number of vested shares by the stock’s fair market value (FMV) on the vesting date. For example, if 100 shares vest when the stock price is $50, you have $5,000 in taxable compensation income. This amount is added to your earnings for the year and is taxed as ordinary income.
Your employer must withhold taxes on this RSU income. As it is considered supplemental income, the federal withholding rate is a flat 22% for amounts up to $1 million and 37% for amounts over that threshold in a year. This standard withholding might not cover your total tax liability, potentially requiring an additional payment when you file your taxes.
Employers use several methods to handle the required tax withholding. The most common approach is “sell to cover,” where the company automatically sells a portion of your newly vested shares to pay the taxes, and you receive the remaining net shares. Another method is “net share settlement,” where the employer withholds the number of shares needed to cover the tax bill and pays the tax authorities from corporate funds. A less common option allows you to pay the withholding taxes out-of-pocket with cash, letting you keep all of your vested shares.
Tax Implications Upon Selling Shares
When you sell your shares, you must establish your cost basis to calculate any capital gain or loss. The cost basis for RSU shares is the stock’s fair market value on the vesting date. This is the same value that was already taxed as ordinary income, which prevents that amount from being taxed a second time.
To calculate your capital gain or loss, subtract your cost basis from the sale price. For instance, selling shares for $60 that had a $50 cost basis results in a $10 capital gain per share. The tax rate on your gains depends on the holding period, which begins on the vesting date.
If you sell the shares one year or less from the vesting date, the gain is short-term and taxed at your ordinary income tax rate. If you hold the shares for more than one year after vesting, the gain is long-term and taxed at lower rates of 0%, 15%, or 20%, depending on your taxable income.
Reporting RSUs on Your Tax Return
To report your RSU activity, you will need a few tax documents. Your Form W-2 from your employer will include the ordinary income from your vested RSUs in Box 1. For any shares sold, your brokerage firm will issue a Form 1099-B detailing the sale proceeds.
The sale of your shares must be reported on Form 8949, “Sales and Other Dispositions of Capital Assets,” with the totals summarized on Schedule D. You will use information from your Form 1099-B to report the sale proceeds, sale date, and your cost basis.
A common issue is that the Form 1099-B from a broker may report an incorrect cost basis, sometimes as $0. This happens because the broker may not have information about the ordinary income you already recognized at vesting. Using an incorrect basis can cause your vesting income to be taxed a second time as a capital gain.
To prevent this, you must manually correct the cost basis on Form 8949. You will enter the correct basis—the fair market value on the vesting date—and use the form’s adjustment columns to report the correction. Many brokerage firms provide a supplemental information statement along with the 1099-B that lists the adjusted cost basis, which should be used for accurate reporting.