What Is the RSU Tax Rate in Washington State?

Restricted Stock Units (RSUs) are a form of equity compensation that provides employees with company stock. For residents of Washington, the tax implications are shaped by the state’s distinct laws. While Washington does not have a personal income tax, affecting how RSUs are taxed when received, obligations change when the shares are sold, bringing federal and a specific state tax into consideration.

Taxation When RSUs Vest

The first taxable event for RSUs occurs on the vesting date, when the employee gains full ownership of the shares. The total fair market value of the vested shares is considered ordinary income for federal tax purposes and is subject to federal income tax withholding and FICA taxes. This income is calculated by multiplying the number of vested shares by the stock’s market price on the vesting day.

Employers report this RSU income on the employee’s Form W-2. Companies may automatically sell a portion of the vested shares to cover tax withholding in a process called “sell-to-cover.” The federal withholding rate for this supplemental income is 22% for amounts up to $1 million.

A benefit for Washington residents is the absence of a state personal income tax. When RSUs vest, no state-level income tax is due on the value of the shares.

Federal Taxation When Selling Shares

After RSUs have vested, any subsequent sale of the shares is a separate taxable event. The federal tax on the sale is determined by the capital gain or loss, calculated as the difference between the sale price and the cost basis. The cost basis for RSUs is the fair market value of the shares on the vesting date.

The holding period, which begins on the vesting date, determines if the gain is short-term or long-term. If shares are held for one year or less before being sold, the profit is a short-term capital gain taxed at the individual’s ordinary federal income tax rates.

If shares are held for more than one year after vesting, the profit is a long-term capital gain. Long-term capital gains are taxed at lower federal rates of 0%, 15%, or 20%, depending on the taxpayer’s taxable income and filing status.

Washington State Capital Gains Tax on Sales

Washington imposes a 7% excise tax on the sale or exchange of long-term capital assets like stocks, which can apply to the sale of RSU shares. This tax is separate from and in addition to any federal capital gains tax. Short-term capital gains are not subject to this Washington state tax.

The tax includes an annual standard deduction, which is adjusted for inflation. The 7% tax only applies to the portion of net long-term capital gains that exceeds this threshold in a single tax year.

Effective January 1, 2025, the state has a tiered system. The 7% rate applies to net long-term capital gains above the standard deduction up to $1 million. For gains surpassing the $1 million threshold, an additional 2.9% tax is imposed, bringing the rate on those excess gains to 9.9%.

Tax Reporting and Filing Requirements

For federal purposes, the ordinary income from vesting is included in the wages reported in Box 1 of your Form W-2. When you sell the shares, your brokerage firm issues a Form 1099-B reporting the sale proceeds. You should verify that the cost basis on Form 1099-B is correct to avoid over-taxation.

The sale is reported to the IRS on Form 8949, “Sales and Other Dispositions of Capital Assets,” where you list the details of each stock sale. The totals from Form 8949 are transferred to Schedule D, “Capital Gains and Losses.” The final figure from Schedule D is then reported on your Form 1040 tax return.

Washington residents who exceed the annual long-term capital gains threshold must file a separate state return. This Washington Capital Gains Tax return is filed electronically with the Department of Revenue via its MyDOR portal, and a copy of your federal return must be submitted with it. The due date for the Washington return and payment is the same as the federal income tax deadline.