Vested vs. Released Shares: What’s the Difference?
Clarifies the distinct financial events in stock compensation, from the moment you earn the right to your shares to the point of actual ownership.
Clarifies the distinct financial events in stock compensation, from the moment you earn the right to your shares to the point of actual ownership.
When a company grants equity, like Restricted Stock Units (RSUs), an employee doesn’t own the shares outright from day one. Instead, they must navigate two distinct stages: vesting and release. While these terms are often used interchangeably, they represent separate events with different implications for ownership and taxes. Vesting is the process of earning the shares, while the release involves settling the resulting tax obligations before the stock is delivered.
Vesting marks the point when an employee has fulfilled the necessary conditions to earn the legal right to their granted shares. Companies use vesting to retain talent and align employee interests with company performance. The specific requirements are detailed in a grant agreement, which outlines the vesting schedule.
A common structure is time-based vesting, which often includes a “cliff.” For instance, a four-year vesting schedule with a one-year cliff means the employee must remain with the company for one full year before any shares vest. On the one-year anniversary, a portion of the grant, such as 25%, vests. After the cliff, the remaining shares typically vest in smaller increments over the rest of the period.
The date of vesting is a taxable event. The fair market value of the vested shares is considered compensation income by the Internal Revenue Service (IRS). This value is subject to ordinary income and payroll taxes, including Social Security and Medicare. This tax liability is created the moment the shares vest, regardless of whether the employee holds or sells them.
Following vesting, the “release” is the administrative process where the company settles the employee’s tax withholding obligation. This process ensures the taxes on the newly earned income are paid, clearing the way for the employee to receive the net number of shares in their brokerage account.
The most prevalent method for handling this tax withholding is “sell-to-cover.” The company’s stock plan administrator automatically sells enough vested shares to cover the required tax withholding, and the proceeds are used to pay federal, state, and payroll taxes. The remaining “net shares” are then deposited into the employee’s account.
The amount withheld is based on statutory rates for supplemental income, which is a flat 22% at the federal level. If an employee’s actual marginal tax rate is higher, they may owe additional taxes when filing their annual return.
For example, if an employee vests 100 shares when the stock price is $50, the total value is $5,000. Assuming a combined tax withholding rate of 30%, the tax obligation is $1,500. To cover this, the company would sell 30 shares, and the employee would receive the remaining 70 shares.
Other methods include “net share settlement,” where the company withholds shares equivalent to the tax value, or allowing the employee to pay the taxes out-of-pocket with cash.
Once the release process is complete and the net shares are in an employee’s brokerage account, the employee owns them outright. The decision to hold or sell the shares introduces a different tax consideration: capital gains tax.
The cost basis for these shares is used for calculating future taxes. For shares acquired through an RSU, the cost basis is the stock’s fair market value on the vesting date. This is the same value used to determine the ordinary income tax liability.
If the employee later sells the shares, any profit or loss is calculated from this cost basis. A sale for a price higher than the cost basis results in a capital gain, and the tax rate depends on the holding period.
A sale within one year of the vesting date results in a short-term capital gain, taxed at the employee’s ordinary income rate. If held for more than one year, the profit is a long-term capital gain, taxed at preferential rates of 0%, 15%, or 20% for 2025.