Restricted stock and restricted stock units look alike on an offer letter, but they are legally different instruments with different tax rules. Restricted stock puts actual company shares in your name on the grant date, subject to forfeiture until they vest. A restricted stock unit is a contractual promise to deliver a share (or its cash value) later, once vesting conditions are met. That single distinction controls whether you can prepay taxes at a low grant-date value, whether you vote as a shareholder during the vesting period, how dividends reach you, and how the IRS treats the whole arrangement.
What Each Award Actually Is
Restricted stock is property. The shares are issued to you on the grant date, and you are a shareholder from day one, with the catch that the company keeps a right to reclaim the shares if you leave before vesting finishes. Federal tax law treats the grant as property transferred for services, even while forfeiture risk remains.1Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection With Performance of Services
An RSU is not property. It is a promise from your employer to deliver a share at a future date, typically when vesting conditions are met. You own nothing until delivery. You are not a shareholder. Because no property changes hands at grant, the property-transfer tax rules that govern restricted stock do not apply to the RSU itself.2Internal Revenue Service. Equity (Stock) Based Compensation Audit Technique Guide
If you have received either award, the first thing to confirm is which one it is. The label on the grant document controls what follows.
How Taxes Work at Vesting
Absent a special election, both awards trigger ordinary income tax at the same moment: when the shares are no longer subject to forfeiture. Under Section 83(a), the taxable amount equals the fair market value of the shares on the vesting date minus anything you paid for them.1Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection With Performance of Services Most grants cost the employee nothing, so the full market value at vesting becomes taxable compensation.
If 200 RSUs vest at $75, you recognize $15,000 in ordinary income that year. Your employer reports the amount on your W-2 and withholds federal income tax, Social Security tax (6.2% up to the 2026 wage base of $184,500), Medicare tax (1.45%), and any state income tax.3Social Security Administration. Contribution and Benefit Base If your Medicare wages for the year top $200,000, an additional 0.9% Medicare tax applies to the excess.4Internal Revenue Service. Topic No. 560 – Additional Medicare Tax
The Withholding Gap
Employers usually satisfy withholding by selling or holding back a portion of the newly vested shares. Sell-to-cover sends shares to the market to raise the cash; net settlement holds shares back internally. Either way, you end up with fewer shares than the grant showed.
The federal withholding rate on this kind of supplemental wage is a flat 22%.5Internal Revenue Service. 2026 Publication 15-T – Federal Income Tax Withholding Methods For anyone in the 32% bracket or higher, that under-withholds against your actual marginal rate. A large vesting event can leave you owing a meaningful balance in April. If you expect a significant vesting year, plan on estimated payments or set the cash aside.
The 83(b) Election: The Biggest Split Between the Two Awards
Section 83(b) lets a restricted stock holder pay ordinary income tax on the grant-date value of the shares instead of waiting until vesting.1Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection With Performance of Services When shares are worth almost nothing at grant, common at early-stage startups, the upfront tax bill can be trivial. All future appreciation then rides as capital gain rather than ordinary income, and the long-term capital gains holding period starts on the grant date instead of the vesting date.
RSU holders cannot make this election. Section 83(b) requires a transfer of property to attach to, and an RSU is a promise, not property. RSU recipients pay ordinary income tax at vesting, without exception. This is the primary tax disadvantage of RSUs compared to restricted stock.
Filing the Election
The deadline is 30 days from the grant date, and no extensions are available. The IRS has issued a standardized form (Form 15620); you sign and mail it to the IRS office where you file your return and provide a copy to your employer.6Internal Revenue Service. Instructions for Form 15620 – Section 83(b) Election Send it by certified mail for proof of the postmark. If you miss the window, the IRS will not grant relief.
The Risk
An 83(b) election is a bet that the stock will rise and that you will stay through vesting. If you leave and the shares are forfeited, the tax you already paid is gone. The statute is explicit that no deduction is allowed for the forfeiture.1Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection With Performance of Services If the price falls below the value you paid tax on, you have overpaid with no way to recover until you sell.
The election makes sense when the spread between grant-date value and expected future value is wide and the upfront cost is low. Penny-priced startup stock with a four-year vest is the classic candidate. Restricted stock at a public company already trading at $80 a share is not.
Voting and Dividends Before Vesting
Because restricted stock transfers real shares at grant, holders are generally treated as shareholders during the vesting period. Most plans give full voting rights on both vested and unvested shares, though the specifics depend on the plan documents and articles of incorporation.
RSU holders have no shareholder rights before delivery. No vote, no proxy materials, no standing at meetings. The relationship looks more like a contract claim than an ownership stake until shares actually arrive.
Dividends work the same way. Restricted stock holders receive real dividends alongside other shareholders. Before vesting (and without an 83(b) election), those dividends are taxed as ordinary compensation, not as qualified dividends, because the shares are still substantially non-vested property. After vesting, or after an 83(b) election, dividends receive normal dividend tax treatment.
RSU holders receive no actual dividends. Many plans credit “dividend equivalents” that accumulate during vesting and pay out in cash or extra shares at settlement, taxed as ordinary wages when paid. Nothing is owed on those equivalents until the underlying RSUs vest.
When You Leave the Company
For both awards, the default rule is the same: unvested shares or units are forfeited when employment ends, whether you resign, are laid off, or are fired for cause. Most plan documents do not distinguish among those reasons. Vested shares in your brokerage account are yours to keep.
Exceptions come from the specific plan or a negotiated severance package, not from the tax code. Acceleration on death or disability, extended vesting during a severance period, and change-of-control provisions are common variations. Read the grant agreement before assuming the default applies to your situation.
The sting is worst for restricted stock holders who filed an 83(b) election and then forfeited. You paid tax on the full grant-date value of shares you no longer own, and the law gives you no deduction for the loss.1Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection With Performance of Services
Selling Vested Shares
Once shares vest and sit in your brokerage account, they behave like any other stock. The ordinary income you recognized (at vesting, or at grant if you filed 83(b)) becomes your cost basis. When you sell, you owe capital gains tax only on the difference between the sale price and that basis.
Hold the shares for a year or less after vesting and any gain is taxed at ordinary rates. Hold longer and you qualify for long-term capital gains rates, which top out at 20% for the highest earners.7Internal Revenue Service. Topic No. 409 – Capital Gains and Losses Restricted stock with an 83(b) election gets a running start: the holding period begins at grant.
The 1099-B Basis Trap
This trips up a large share of equity compensation recipients. When you sell vested shares, your broker sends a Form 1099-B reporting the proceeds. Under current IRS rules, brokerages are prohibited from reporting the full adjusted cost basis for shares acquired through equity compensation. The basis box often shows $0 or is blank.
Enter that $0 on your return and you will pay tax again on income you already paid tax on at vesting. The fix is to use the supplemental information your broker provides alongside the 1099-B and report the correct adjusted basis on Form 8949. Skipping the adjustment is one of the most common and expensive mistakes in this area.
Wash Sales and RSU Vesting
Sell company stock at a loss within 30 days before or after an RSU vests, and the IRS treats the vesting as an acquisition of substantially identical securities. The wash sale rule disallows the loss for the current year and adds it to the basis of the newly vested shares. The loss is not permanently gone, but you cannot claim it when you planned. Employees on monthly or quarterly vesting schedules are the most exposed. Check the vesting calendar before selling at a loss for tax purposes.
RSUs at Private Companies
RSUs dominate at late-stage private companies, but the mechanics change because there is no public market to sell shares for tax withholding. Most private-company RSUs use “double-trigger” vesting: shares are only delivered when both a time-based condition and a liquidity event (typically an IPO or acquisition) occur. You can satisfy four years of service and still receive nothing until the company goes public or is bought. If the liquidity event never happens before the award expires, the units expire worthless.
The tradeoff is that no tax is owed until both triggers hit and shares are actually delivered, which avoids the trap of owing a large tax bill on stock you cannot sell.
Since 2018, employees at some qualifying private companies have been able to defer federal income tax on RSU settlement (or option exercise) for up to five years under Section 83(i). The election is due within 30 days of settlement, and the company must give notice of eligibility. Social Security and Medicare taxes are still due immediately, and the deferral only reaches federal income tax.8Office of the Law Revision Counsel. 26 USC 409A – Inclusion in Gross Income of Deferred Compensation The company must have granted equity broadly (to at least 80% of its U.S. employees during the year) and the stock cannot be publicly traded. In practice, few companies qualify.
Which One You’ll Actually Receive
Most employees do not get a choice. Public companies overwhelmingly grant RSUs because they are simpler to administer, create no tax obligation at grant, and eliminate the risk that an employee forgets to file an 83(b) election on time. Late-stage private companies also favor RSUs, with double-trigger vesting solving the liquidity problem.
Restricted stock shows up most often at early-stage startups, where the share price is low enough to make an 83(b) election dramatically improve the tax picture. If you are joining an early startup and shares are worth fractions of a penny, a small tax bill now to convert future gains into long-term capital gains is usually worth the forfeiture risk.
When you do have a choice, the question comes down to two things: how confident you are that the stock will rise, and how confident you are that you will stay through vesting. High confidence on both favors restricted stock with an 83(b) election. Meaningful doubt about either favors RSUs, where you owe nothing until real shares land in your account. The worst outcome in equity compensation is paying tax on something you never keep, and the 83(b) election is the only route to that outcome.