How are RSUs taxed? Everything from vesting to selling to diversifying
Natan Benchimol
Brokerage Operations Lead
Two separate tax events apply to RSUs: one at vesting, one at sale. It's the second one people forget is even coming.
Picture vesting 2,000 shares worth $150,000, holding for 14 months while the stock climbs 40%. Selling triggers capital gains on that 40% gain, stacked on top of whatever tax already got paid at vesting.
Most of the expensive mistakes trace back to treating those as a single event, or missing the second one entirely.
The tax bill at vesting
The IRS treats the full value of vesting restricted stock units as ordinary income, taxed at your regular rate.
That taxable amount comes from the fair market value on the vesting date, multiplied by however many shares vested.
Employers are on the hook for withholding this tax, which they do by selling a portion of the vested shares ("sell-to-cover") and forwarding the proceeds to the IRS. The number of shares sold gets calculated off a flat supplemental wage rate rather than your real tax rate.
Which means the withholding can land short or long of what's actually owed. Never assume the withheld shares settled the full bill; check it against your actual bracket and run the numbers before tax season ends.
The tax bill when you sell
Vesting is only half the story. Your cost basis locks in at the fair market value on the vesting date (the same figure that determined your ordinary income tax). Vest 100 shares at $100 fair market value, and the cost basis sits at $10,000.
Everything from there is capital gain or loss territory.
Sell the same day shares vest, and there's barely any capital gain to report, since sale price and cost basis are nearly the same number. Hold while the stock rises, though, and the gap between sale price and cost basis becomes the taxable capital gain.
Short-term vs. long-term: which rate applies
What determines the rate is how long the shares are held after vesting, specifically, not after the grant date and not after the original award. Get the vesting date wrong, and the tax bill can look very different than expected.
| Holding period after vesting | Tax treatment | Typical rate |
|---|---|---|
| One year or less | Short-term capital gain | Taxed as ordinary income (your regular bracket) |
| More than one year | Long-term capital gain | 0%, 15%, or 20% federal, depending on income |
Take a senior engineer at a mid-size fintech company who vests 2,000 shares worth $150,000. Fourteen months on, with the stock up 40%, she sells, and that $60,000 gain gets the long-term rate.
Sell eleven months in instead, and that same $60,000 hits her regular income tax rate, a higher one, rather than the long-term rate. Missing the one-year mark by even a few weeks can cost thousands more.
See if you qualify for a way to diversify without selling or owing tax on the sale.
The mistakes that cost people the most
A handful of errors show up over and over in RSU tax planning.
Assuming the withheld shares covered everything
Companies calculate withholding using a flat rate that often falls short of the real bill, leaving a surprise balance due at tax time.
How to avoid this mistake: Check the withheld amount against your actual marginal bracket ahead of tax season, and set aside cash for any gap.
Getting the cost basis wrong
Brokers sometimes report a $0 cost basis on 1099-B forms, since they can't see the income already taxed at vesting. Leave that uncorrected, and capital gains tax gets paid twice on the same value: once as ordinary income, once again as an inflated capital gain.
How to avoid this mistake: Grab the vesting-date fair market value from your equity plan statement, and use it to fix any $0 basis your broker reports.
Ignoring the impact of a big vesting year
A large vesting year can push you into a higher bracket than planned, with knock-on effects for quarterly estimated taxes, AMT exposure, and other income-linked thresholds.
How to avoid this mistake: Loop in a tax professional before a big vesting year lands, so quarterly payments can be adjusted ahead of any shortfall.
Letting a concentrated position build up
Hang onto vested shares instead of selling them off as they vest, and years of grants can quietly turn into a concentrated position in one stock. It's gradual: a few thousand shares each quarter, reinvested instead of sold, until one company dominates more of the portfolio than feels comfortable.
How to avoid this mistake: Check what share of net worth sits in a single stock at least annually, and look at diversification options before it turns into the portfolio's biggest risk.
Where exchange funds fit in
Years of vested RSUs building into a large, low-cost-basis position runs into the same capital gains problem covered above, just at a bigger scale.
An exchange fund offers an alternative: concentrated shares go into a pooled fund in exchange for a diversified basket, and since the transaction counts as an exchange rather than a sale under IRS rules, no capital gains tax comes due at the point of contribution.
Glidepath charges members no management fee while helping diversify a concentrated position and defer tax until it's time to pay. Get started to see if you qualify to join.
Frequently asked questions
What's my cost basis on RSU shares?
The fair market value on the vesting date, not the grant price, and not $0 (worth double-checking, since brokers don't always report it correctly).
Are RSUs taxed as capital gains?
Not at vesting. Capital gains tax only applies to the change in value between vesting and the eventual sale.
How are my RSUs taxed?
Ordinary income at vesting, based on the fair market value on the vesting date. Everything from that point until sale is a separate short- or long-term capital gain, depending on how long the shares are held after vesting.