What Happens When RSUs Vest: Taxes, Cost Basis, and Selling

When your restricted stock units vest, the company converts each unit into an actual share of stock registered in your name, and the full market value of those shares becomes taxable wages that day. That is the short version of what happens when RSUs vest: you go from holding a contractual promise to owning real stock, and the IRS treats the value of that stock as ordinary income on your W-2. Your employer withholds some tax immediately, usually at a flat federal rate that undershoots what higher earners actually owe, and the price on the vest date sets the cost basis you’ll use whenever you decide to sell.

From Promise to Shares in Your Account

Before vesting, RSUs are just a contract. You have no ownership rights, no voting power, and no claim to dividends. On the vest date, the company extinguishes the units and issues actual common stock in your name, and you become a shareholder with the same rights as anyone else who owns that stock.

The shares land in a brokerage account your employer has set up for you, typically through Fidelity, E*Trade, or Schwab. You’ll see whole shares rather than a pending unit count. If a vest produces a fractional share, most plans round down and pay the fraction in cash or sell it and deposit the proceeds.

The Tax Bill That Hits on the Vest Date

Federal tax law treats the fair market value of your vested shares as compensation income in the year they vest.1Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection With Performance of Services The IRS taxes this at your regular income tax rates, the same rates that apply to your salary, not at the lower capital gains rates.2eCFR. 26 CFR 1.83-1 – Property Transferred in Connection With the Performance of Services

The taxable amount is the number of shares that vest multiplied by the stock’s fair market value on the vest date. Most plans use the closing price. So if 200 shares vest when the stock trades at $75, you recognize $15,000 in ordinary income that year.

That $15,000 shows up on your W-2 and is subject to three payroll taxes on top of federal and state income tax:

  • Social Security tax at 6.2%, applied to combined wages up to $184,500 in 2026. If your salary alone already tops that cap, the RSU income owes no additional Social Security tax.3Social Security Administration. 2026 Cost-of-Living Adjustment (COLA) Fact Sheet
  • Medicare tax at 1.45%, with no wage cap.
  • Additional Medicare tax of 0.9% once your total wages for the year exceed $200,000 (single) or $250,000 (married filing jointly).4Internal Revenue Service. Topic No. 560, Additional Medicare Tax

State income tax adds another layer. States that tax income use supplemental wage rates ranging from about 1.5% to over 11%, and nine states don’t tax income at all. Between federal income tax, payroll taxes, and state tax, 35% to 50% or more of a sizable vest commonly goes to taxes.

Why Your Withholding Probably Isn’t Enough

Your employer must withhold federal income tax on RSU income, and most use the flat 22% supplemental wage rate for vests under $1 million (37% above that).5Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide The problem is that 22% often doesn’t match your actual marginal rate. If your salary plus RSU income lands you in the 32% or 35% bracket, the automatic withholding leaves a gap you’ll owe at filing.

You can avoid an underpayment penalty by hitting the IRS safe harbor: pay at least 90% of the current year’s total tax, or 100% of the tax shown on last year’s return, whichever is less. If your adjusted gross income was above $150,000 in the prior year, the prior-year threshold rises to 110%.6Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty Making quarterly estimated payments in a vest year is the cleanest way to close the gap.

How the Tax Gets Collected From Your Vest

Companies generally use one of three methods to cover the immediate withholding:

  • Sell-to-cover. The brokerage automatically sells enough shares on the open market to cover the required withholding and deposits the rest into your account. If 200 shares vest and the withholding calls for selling 60, you keep 140.
  • Net share settlement. The company withholds a portion of your shares before they’re ever issued and pays the tax itself from its own cash. You receive fewer shares, and no market sale takes place.
  • Cash payment. Some plans let you send cash in advance so you keep every share. This is uncommon but useful if you want to hold the full position.

Your equity plan documents will say which method is the default and whether you can choose. Check well before the vest date so you’re not surprised by a smaller share deposit.

Your Cost Basis Going Forward

The stock price on your vest date becomes your cost basis, the starting point for calculating any capital gain or loss when you later sell. Because you already paid income tax on that value at vesting, you shouldn’t be taxed on it again at sale. Simple in theory, expensive in practice.

When your brokerage reports the sale on Form 1099-B, it may list your cost basis as $0 or leave the box blank. IRS rules often prevent brokers from reporting the full adjusted basis for shares acquired through equity compensation. Take the 1099-B at face value and you’ll pay capital gains tax on the entire sale price, including the amount you already paid ordinary income tax on at vesting.7Internal Revenue Service. 2026 Instructions for Form 1099-B

Look for a Supplemental Information form from your brokerage alongside the 1099-B. It shows the adjusted cost basis, meaning the fair market value on the vest date, which you enter on Form 8949. That tells the IRS you already paid tax on the vesting income, so you only owe capital gains tax on the difference between the sale price and the vest-date price.

Selling the Shares Later

Once you sell, the profit or loss compared to your cost basis is a capital gain or loss. The rate depends on how long you held after vesting:

  • Short-term (held one year or less): taxed at your ordinary income rates.
  • Long-term (held more than one year): taxed at 0%, 15%, or 20% depending on your total taxable income.8Internal Revenue Service. Topic No. 409, Capital Gains and Losses

The holding clock starts on the vest date, not the grant date.9Office of the Law Revision Counsel. 26 USC 1222 – Other Terms Relating to Capital Gains and Losses Shares that vested on March 1, 2026 need to be held past March 1, 2027 for long-term treatment. If the stock drops below your vest-date price, selling generates a capital loss you can use against other gains or deduct up to $3,000 against ordinary income each year.

One trap to watch: the wash sale rule. If you sell company stock at a loss, the IRS disallows the loss if you acquire substantially identical shares within 30 days before or after the sale, a 61-day window in total.10Office of the Law Revision Counsel. 26 USC 1091 – Loss From Wash Sales of Stock or Securities A new RSU vest counts as acquiring shares. Sell at a loss, then have another tranche vest within that window, and your loss deduction is denied for the number of shares replaced. The disallowed amount gets added to the basis of the new shares, so it isn’t permanently gone, but the current-year tax bill can surprise you. Check your vest schedule before harvesting any loss.

When You Can Actually Sell

Owning vested shares doesn’t automatically mean you can trade them. Most public companies impose blackout periods, windows each fiscal quarter when employees can’t trade company stock, typically in the weeks before an earnings release. Your company’s insider trading policy will spell out the restricted windows and any pre-clearance requirements.

These policies exist because federal securities law prohibits trading on material nonpublic information, and both civil and criminal penalties apply.11Office of the Law Revision Counsel. 15 USC 78u-1 – Civil Penalties for Insider Trading12Office of the Law Revision Counsel. 15 USC 78ff – Penalties For a structured way to sell without navigating blackouts, a Rule 10b5-1 trading plan sets a predetermined schedule for sales at a time when you don’t possess material nonpublic information. The SEC requires a cooling-off period after adoption or modification before trades can begin, and directors and officers must certify they aren’t aware of nonpublic information when setting the plan up.13U.S. Securities and Exchange Commission. SEC Adopts Amendments to Modernize Rule 10b5-1 Insider Trading Plans

If You Leave Before the Next Vest

Anything not yet vested when you leave is typically forfeited. Resignation, layoff, termination for cause: the result is usually the same, and the unvested portion of your grant disappears. A large paper grant can vanish entirely if you leave before the vest dates arrive.

Most plans carve out limited exceptions:

  • Death. Unvested RSUs commonly vest immediately and are delivered to your estate.
  • Disability. Many plans allow unvested units to continue vesting on schedule or accelerate within a set period after the disability begins.
  • Retirement. Some plans provide full or pro-rata vesting for employees who meet age and years-of-service requirements.
  • Change of control. If the company is acquired, the acquirer may accelerate vesting, convert units into its own stock, or cash out the awards. Terms vary widely.
  • Involuntary termination without cause. Some plans offer pro-rata vesting for units held past a minimum period, often conditioned on signing a release.

The specifics live entirely in your company’s equity plan and your individual grant agreement. Read them before making decisions about leaving, because the forfeiture rules can swing hundreds of thousands of dollars.

One Exception for Private-Company Employees

If you work for a private company, vesting can create a squeeze: you owe income tax on shares you may not be able to sell. Section 83(i) lets qualifying employees defer the income tax on vested shares for up to five years.14GovInfo. 26 USC 83 – Property Transferred in Connection With Performance of Services

Several conditions apply:

  • Eligible corporation. No company stock can be publicly traded, and the company must have a written plan granting stock options or RSUs to at least 80% of its U.S. employees with the same rights and privileges.
  • Excluded employees. Current or former CEOs, CFOs, the four highest-compensated officers, anyone who owns (or has owned in the past 10 years) 1% or more of the company, and family members of those executives cannot elect.
  • Timing. You must file the election within 30 days of the vest date.15Internal Revenue Service. Guidance on the Application of Section 83(i) Notice 2018-97
  • No cash-out option. If you have the right to receive cash instead of stock, or to sell the stock back to the company at vesting, the shares don’t qualify.

The deferral ends at the earliest of five years after vesting, the date the stock becomes publicly traded, the date you become an excluded employee, or the date you revoke the election. Even with the deferral, your employer must still withhold income tax at vesting. The deferral only affects when you include the income on your return, not the withholding itself. Narrow in practice, but for rank-and-file employees at qualifying startups it can prevent a cash crunch on illiquid shares.