What to Do With Vested RSUs: Sell, Hold, and Taxes

Restricted Stock Units (RSUs) are a form of equity compensation where companies promise to deliver shares of company stock or their cash equivalent at a future date. This delivery is contingent on certain conditions, such as continued employment or achieving performance milestones. The process by which these conditions are met, leading to full ownership, is called vesting. Until RSUs vest, they remain restricted. Once vested, they become fully owned shares, requiring decisions about their management and tax implications.

Tax Implications of Vested RSUs

When Restricted Stock Units vest, their fair market value on the vesting date is generally treated as ordinary income, subject to federal, Social Security, and Medicare taxes. This income is reported on an employee’s Form W-2 for that tax year.

Companies typically handle the initial tax obligation at vesting by withholding a portion of vested shares or their cash equivalent. This “sell-to-cover” method sells enough shares to cover the immediate tax liability. The federal supplemental wage withholding rate is often 22% for income up to $1 million, increasing to 37% for amounts exceeding $1 million. This default rate may not always cover the employee’s full tax liability, especially if their overall income places them in a higher tax bracket.

The cost basis of vested RSUs is the fair market value on the vesting date, crucial for determining capital gains or losses when shares are sold. Brokerage statements like Form 1099-B might report a $0 or incorrect cost basis, requiring taxpayer adjustment to avoid overpaying taxes. Ensure the cost basis reported on these forms is accurate to prevent double taxation on income already recognized at vesting.

If vested shares are held and then sold, any difference between the sale price and the established cost basis (the vesting price) is subject to capital gains or losses. The tax rate depends on the holding period. Shares held for one year or less result in short-term capital gains or losses, taxed at ordinary income rates. Shares held for more than one year qualify for long-term capital gains or losses, typically taxed at more favorable rates (0%, 15%, or 20%, depending on income).

High-income individuals may also be subject to the 3.8% Net Investment Income Tax (NIIT) on certain investment income. Taxpayers receive Form 1099-B from their brokerage, detailing stock sale proceeds for reporting capital gains and losses. This information is used to complete Form 8949 and Schedule D when filing federal income taxes.

Deciding on Your Vested Shares

Once RSUs vest and initial tax obligations are addressed, individuals decide how to manage their shares. One option is to hold them, maintaining ownership and exposure to the company’s future performance and potential appreciation. Holding shares can also provide dividend income.

Alternatively, individuals can sell their vested shares. Selling converts shares into cash, providing immediate liquidity and realizing any capital gains or losses accumulated since vesting. Selling also reduces financial exposure to a single company’s stock, aiding overall portfolio management.

A combination approach, selling some shares and holding others, is also common. This secures some cash while retaining equity, balancing immediate financial needs with continued participation in the company’s potential growth.

Several factors influence the decision to sell, hold, or partially manage vested shares. Personal financial needs, like funding a home down payment or covering expenses, often play a role. The shares’ current value relative to their vesting price directly impacts potential capital gains or losses. An individual’s overall financial picture, including wealth tied to company stock, also guides this decision.

Executing Transactions with Vested Shares

After determining how to manage vested shares, the next step is executing transactions. Employees access shares through a company-designated brokerage account or stock plan administrator’s online portal, which serves as the primary interface.

To sell shares, individuals place a sell order through their brokerage platform. Common order types include a market order (executes immediately at best price) or a limit order (specifies minimum sale price). Once executed, the transaction enters a T+1 settlement period, meaning it settles one business day after the transaction date.

Upon settlement, sale proceeds are typically deposited into a linked bank account. While initial tax withholding occurs at vesting, any additional capital gains tax liability from the sale is calculated and paid when filing annual taxes. This capital gains tax is not typically withheld at the point of sale, unless estimated taxes are paid throughout the year.

Beyond selling, individuals may transfer vested shares. An Automated Customer Account Transfer Service (ACATS) moves securities from the company’s designated brokerage to a personal account. This process, typically initiated by the receiving firm, takes three to six business days. An ACATS transfer is not a taxable event, allowing shares to be moved without triggering capital gains taxes.

Another option is gifting shares. While tax implications vary, gifting may be subject to annual gift tax exclusion limits; for example, in 2025, up to $19,000 per person can be gifted without filing a gift tax return. The recipient typically assumes the giver’s original cost basis and holding period. Due to complexities like the “kiddie tax” for minors and lifetime gift tax exclusions, consulting a tax professional is advisable before gifting shares.

Regardless of whether shares are sold or transferred, brokerage firms provide essential documentation for tax reporting, including brokerage statements and Form 1099-B detailing sale proceeds. This documentation is crucial for accurately reporting transactions to the IRS and ensuring tax compliance.