How are RSUs (restricted stock units) taxed when they vest and when I sell?

RSUs are taxed at two separate points: first when they vest (ordinary income), and again when you sell the shares (capital gains).

At Vesting — Ordinary Income Tax:

When your RSUs vest, the fair market value of the shares on that date is treated as ordinary compensation income — exactly like a cash bonus. This amount is added to Box 1 of your W-2 and is subject to:

• Federal income tax at your marginal rate
• FICA (Social Security + Medicare)
• State income tax

Your employer typically withholds taxes using a flat 22% federal supplemental rate (37% for amounts over $1 million), which often under-withholds for high earners. You may owe additional taxes at filing.

Sell-to-Cover: Many employers automatically sell a portion of your vested shares to cover withholding taxes. This is just withholding — you still own the remaining shares and may owe more at tax time.

At Sale — Capital Gains Tax:

After vesting, your cost basis in the shares is the fair market value on the vesting date (the amount already taxed as income). When you sell:

• Short-term capital gains (held less than 1 year from vest date): taxed at ordinary income rates
• Long-term capital gains (held more than 1 year from vest date): taxed at 0%, 15%, or 20% depending on your income

Common mistake: Reporting the full sale proceeds as a gain when part of it was already taxed as income. Your brokerage's 1099-B may show $0 or incorrect cost basis — you must enter the correct basis on Form 8949 to avoid double taxation.

Tax planning tip: If RSU income is pushing you into a higher bracket, consider increasing 401(k) contributions in the same year to partially offset the income.