How RSUs Are Taxed, and Where the Bill Appears
Restricted stock units feel like an investment and are taxed like a bonus. The full value on the vesting date is ordinary income that year, whether or not you sell. Two consequences follow, and both surprise people: the withholding is usually too low, and holding the shares afterwards is a deliberate decision to concentrate.
- Taxed at vesting:: The full market value on the vesting date is ordinary income, whether you sell or hold.
- The withholding is often short:: Employers commonly withhold at a flat supplemental rate, which under-collects for higher earners.
- Basis resets at vesting:: Your cost basis is the vesting value, so selling immediately produces almost no additional gain.
- Holding is a new decision:: Keeping the shares is the same as taking the cash and buying your employer's stock with it.
Where the AI summary above gets this wrong
"You are taxed on RSUs when you sell the shares."
That's surface-true. Here's what it misses:
- Vesting is the taxable event, not selling — The income arrives the day the units vest, at the full market value, regardless of whether a single share is sold. Someone who holds through a subsequent price collapse still owes tax on the higher vesting value, and that combination has bankrupted people in past market cycles.
- Flat withholding under-collects for high earners — Supplemental wages are commonly withheld at a flat statutory rate. For someone whose marginal rate is well above that, a large vest creates a shortfall that surfaces at filing, sometimes with an underpayment penalty attached. Adjusting other withholding or making an estimated payment in the same quarter is the fix.
- Holding vested shares is an active choice — Because basis resets to the vesting value, selling immediately costs almost nothing in additional tax. Continuing to hold is economically identical to receiving cash and buying employer stock with it — which is a concentration decision most people would refuse if it were put that way.
01 What happens on the vesting date
Until they vest, restricted stock units are a promise. On the vesting date the shares are delivered and their full market value becomes ordinary compensation income, reported on the W-2 like salary.
Employers normally cover the withholding by retaining some of the vesting shares — sell to cover — and delivering the rest. That looks like the tax has been dealt with, and for many people it has not been dealt with fully, because the rate applied is a flat statutory rate for supplemental wages rather than your own.
Your cost basis in the delivered shares is the vesting value. From that moment they behave like any other holding, and the rules of a taxable account apply to whatever happens next.
Source: Publication 525
02 The withholding shortfall
The flat supplemental rate works reasonably for a modest bonus. For a large vest received by someone already in a higher bracket, it collects materially less than is owed, and nothing in the payslip says so.
The gap appears the following April, and if it is large enough it brings an underpayment penalty with it. The remedies are to increase withholding on regular salary for the rest of the year, or to make an estimated tax payment in the quarter the vest occurred — the same quarterly mechanics that govern other mid-year payroll decisions.
The estimate is easy to run. Multiply the vest value by the gap between your marginal rate and the rate withheld, and set that aside when the shares arrive rather than discovering it later.
Shows: the shortfall between the flat supplemental rate withheld on vesting RSUs and the marginal rate that actually applies to the income. Ignores: state tax, payroll taxes, other withholding across the year, and the underpayment penalty that can attach to the shortfall.
Source: Publication 525
03 Sell or hold, and the gain that follows
Selling on the vesting date realises essentially no gain, because basis equals the vesting value. That makes the immediate sale the cheapest possible exit, and it is the reason the default advice is to sell unless there is a specific reason not to.
Holding starts a new capital gains clock from the vesting date. A sale within a year is short-term and taxed at ordinary rates; after a year it is long-term. Only the movement after vesting is affected — the compensation income is already fixed.
The real question is concentration. Salary, bonus, health cover and now a large share position all depend on one company. Diversifying that is the same problem as any other single-stock exposure, and the portfolio structure should be built around what remains after the RSUs are sold rather than around holding them.
The sentence that changes the conversation is this one: if your employer paid you the cash instead, would you use it to buy their stock? Almost nobody says yes, and yet holding vested RSUs is exactly that decision, made by default. Sell on vest unless there is a reason, put the withholding shortfall aside the same week, and let the rest of the portfolio be built out of something other than your employer.
FAQ
When are RSUs taxed?
On the vesting date, at the full market value of the shares delivered, as ordinary compensation income. Selling is a separate event that produces only a capital gain or loss from the vesting price.
Why do I owe more tax on RSUs than was withheld?
Employers commonly withhold on supplemental wages at a flat statutory rate. If your marginal rate is higher, the withholding under-collects and the difference is due at filing.
Should I sell RSUs as soon as they vest?
Selling immediately costs almost no additional tax because basis equals the vesting value. Holding is economically the same as buying employer stock with the cash, which is a concentration decision worth making deliberately.
Sources
Regulator references
- Publication 525 · Internal Revenue Service · 2026How restricted stock units are taxed when they vest and what is included in income.Last verified: 2026-09-07
- Topic 409: capital gains and losses · Internal Revenue Service · 2026The treatment of any change in value after vesting, once the shares are yours.Last verified: 2026-09-07
Calculator unit tests · the assertions this page's worked example is checked against, and their last result
Changelog
- 2026-09-07 — initial publish (new format)
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Jordan Reeves
Founder of Talk Through Wealth. A software engineer for over a decade before turning to retirement planning, Jordan built the projection engine after watching family members get fragmented, country-by-country advice that never reconciled. He writes about retirement the way the engine computes it: month-by-month, lifetime-long, and skeptical of any rule of thumb that hasn't been run through the math.