Stock grants work by giving you company shares, or a contractual promise to receive shares later, as part of your pay. You typically have to stay at the company for a set period before those shares are fully yours, and once they are, their value on that day gets added to your W-2 as ordinary wages. Any price change after that point becomes a capital gain or loss when you eventually sell. The mechanics, and the tax surprises, depend heavily on which type of grant you have.
The Two Main Types: RSAs and RSUs
A restricted stock award (RSA) transfers actual shares to you on the grant date. You own the stock right away, with the ability to vote it and collect any dividends, but it comes with strings attached: a vesting schedule you have to satisfy, and the company’s right to repurchase the shares (often at the original price or nothing) if you leave early.1The Schwab Equity Award Center. Restricted Stock Units and Awards
A restricted stock unit (RSU) is different. It’s a promise from the company to deliver shares (or their cash equivalent) at a future date. You don’t own anything at grant. No shares sit in your account, and you have no voting rights or dividends until the RSUs vest and the company deposits real shares into your brokerage account.1The Schwab Equity Award Center. Restricted Stock Units and Awards
RSUs have become the dominant form of equity compensation at public companies. You don’t pay anything to receive them, and the value is easy to calculate: shares times current price. RSAs show up more often at very early-stage startups, where the share price is low enough that owning the stock outright is worth the risk.
How Vesting Works
Vesting is what turns a grant on paper into shares you actually control. Until shares vest, you can’t sell them, and you’ll usually lose them entirely if you leave.
The most common structure is four-year vesting with a one-year cliff. Nothing vests during the first 12 months. On your one-year anniversary, 25% of the grant vests all at once. The remaining 75% then vests in equal monthly or quarterly installments over the next three years.
Performance-based vesting is the other main flavor. Instead of (or in addition to) a time requirement, your shares vest only when the company hits a specific milestone: a revenue target, an IPO, a product goal.2Deloitte Accounting Research Tool. 3.4 Vesting Conditions If the target isn’t met in time, those shares never vest.
Read your grant agreement for accelerated vesting provisions covering disability, death, or qualifying retirement. Those “good leaver” clauses vary a lot from one company to the next.
What You Owe in Tax at Vesting
This is where most people get caught off guard. Stock grant income is taxed as ordinary wages, not investment income. For RSUs, the taxable event happens when shares are delivered at vesting. The fair market value of the shares that day is added to your W-2. For RSAs without a Section 83(b) election, it works the same way at each vesting date.3Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection With Performance of Services
That income is also subject to payroll taxes. Social Security applies at 6.2% on earnings up to the 2026 wage base of $184,500, and Medicare applies at 1.45% with no cap.4Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates5Social Security Administration. 2026 Cost-of-Living Adjustment (COLA) Fact Sheet If your Medicare wages for the year exceed $200,000 (single) or $250,000 (married filing jointly), an additional 0.9% Medicare surtax applies to the excess.6Internal Revenue Service. Topic No. 560, Additional Medicare Tax A large vesting event can push you over that line on its own.
Why Withholding Often Isn’t Enough
Employers withhold federal income tax on stock grant income at a flat 22% supplemental wage rate. If your total supplemental wages for the year exceed $1 million, the rate jumps to 37% on the excess.7Internal Revenue Service. Publication 15 (2026), (Circular E), Employers Tax Guide The problem: if you’re in the 32% or 35% bracket, 22% doesn’t come close to covering your actual liability. You’ll owe the difference at tax time, and a large vesting event can also trigger a requirement to make estimated payments during the year.
Most companies handle the withholding through a “sell to cover” arrangement. When your RSUs vest, the company automatically sells a portion of the delivered shares and remits the proceeds to the IRS and state tax authorities on your behalf.8SEC.gov. Exhibit 10.1 Ibotta, Inc. 2024 Equity Incentive Plan You keep the remaining shares. The amount withheld covers the statutory minimum, not necessarily what you’ll ultimately owe. State income tax comes out of the same process and can range from 0% to more than 13% depending on where you live.
The Section 83(b) Election (RSAs Only)
If you receive an RSA, you can file a Section 83(b) election within 30 days of the grant date to pay tax on the full value of the shares now, at the grant date, rather than at each vesting installment. That deadline is absolute. Miss it and the option is gone.3Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection With Performance of Services
The strategy pays off when shares are granted at a low valuation, typical at an early-stage startup. If you pay ordinary income tax on shares worth $0.50 at grant, and they’re worth $10 when they vest three years later, the $9.50 of appreciation avoids ordinary income tax entirely. It gets taxed at long-term capital gains rates when you sell, which are meaningfully lower.
The risk is real. If the stock price drops, you’ve paid tax on a higher value than the shares are now worth, and there’s no refund. If you leave before vesting and the shares are repurchased, you lose both the shares and the tax you already paid. The statute specifically bars a deduction for property forfeited after an 83(b) election.3Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection With Performance of Services Filing means sending the election to the IRS Service Center where you file your return, giving a copy to your employer, and keeping proof of mailing.
This election does not apply to RSUs. There’s nothing to elect on, because you don’t own property at grant.
Selling the Shares
Once shares vest and land in your brokerage account, anything that happens to the price after that is a capital gain or loss. Your cost basis is the fair market value on the vesting date, the same figure that was added to your W-2. For RSAs with an 83(b) election, the cost basis is instead the fair market value at grant.
How long you hold the shares after vesting determines the rate. Sell more than one year after vesting (or more than a year after grant, for 83(b) shares), and the gain qualifies for long-term capital gains treatment. For 2026, those rates are:
- 0% on taxable income up to $49,450 (single) or $98,900 (married filing jointly)
- 15% on income above those thresholds up to $545,500 (single) or $613,700 (joint)
- 20% on income above $545,500 (single) or $613,700 (joint)
The thresholds reflect your total taxable income, not just the stock sale.9Internal Revenue Service. 2026 Inflation-Adjusted Items Sell inside one year and the gain is short-term, taxed at your ordinary income rate, which can be roughly double the long-term figure.
High earners face an additional 3.8% net investment income tax on capital gains. It applies to the lesser of your net investment income or the amount by which your modified adjusted gross income exceeds $200,000 (single), $250,000 (married filing jointly), or $125,000 (married filing separately).10Internal Revenue Service. Topic No. 559, Net Investment Income Tax Between the 20% top rate and the 3.8% surtax, the effective federal ceiling on long-term stock sale gains is 23.8%.
The Cost Basis Trap on Form 1099-B
This one costs people thousands. When your broker sends Form 1099-B after you sell stock grant shares, the cost basis is often reported as $0 or left blank. The IRS doesn’t require brokers to include the compensation portion in the reported basis.
If you enter those figures into your return without correcting them, you pay tax on the same income twice: once as wages when the shares vested, and again as capital gains when you sold. You have to manually adjust the cost basis to reflect the fair market value at vesting, the same amount already reported on your W-2. Save your vesting confirmations and brokerage statements from each vesting date so you can rebuild the correct basis at tax time. Overpayments here routinely run into thousands of dollars, and most people never notice.
If You Leave the Company
Unvested stock grants are almost always forfeited when you leave, whether you resign or are terminated. Unvested RSUs cancel. Unvested RSA shares revert to the company through its repurchase right. Vested shares already in your brokerage account stay yours, though some agreements include clawback provisions that let the company reclaim them in narrow circumstances like fraud or a non-compete violation.
If you’re negotiating a job change, the value of unvested stock is one of the most commonly overlooked items in compensation talks. Many candidates successfully negotiate a signing bonus or replacement grant at their new employer to offset what they’re leaving behind, but only if they raise it during the offer stage. Once you’ve accepted and started, that leverage is gone.
If the Company Is Acquired
Stock grants don’t automatically disappear in an acquisition, but the outcome depends on the deal terms and your grant agreement. In a cash acquisition, unvested RSUs may be cashed out at the deal price, converted into grants of the acquiring company’s stock, or, less commonly, cancelled. Some deals accelerate vesting entirely at closing, which creates a large one-time tax event.
Grant agreements usually include one of two acceleration structures. Single-trigger acceleration vests your shares automatically when the deal closes. Double-trigger acceleration requires two events: the acquisition plus your involuntary termination (or resignation for good reason) within a set window, commonly 9 to 18 months after closing. Double-trigger has become the more common approach at venture-backed companies. If your grant has no acceleration clause at all, the acquiring company generally decides whether to honor the original schedule, convert your grants, or buy them out.