An RSU grant is your employer’s written promise to give you shares of company stock once you meet certain conditions, almost always continued employment for a set period. Until those conditions are satisfied you own nothing: no shares, no votes, no dividends. When the units vest, the shares are issued to your brokerage account and the IRS treats their full market value that day as ordinary wage income. That single tax event, and the cost basis confusion that follows when you eventually sell, is what makes RSUs feel more complicated than they are.
What the Grant Agreement Actually Gives You
Every award starts with a grant agreement. It states how many units you received, the grant date that starts your vesting clock, the schedule on which units convert into shares, and the type of stock you’ll eventually receive, which is almost always common stock.
What it does not give you is any current ownership. Before vesting, your RSUs are an unsecured obligation of the company, backed only by its general assets rather than any dedicated fund.1SEC. Exhibit 10.12 – Brilliant Earth Group, Inc. 2021 Incentive Award Plan Restricted Stock Unit Award Grant Notice If the company files for bankruptcy before your units vest, they may be worth nothing. You have no stockholder rights during the vesting period, so you don’t vote and you don’t receive dividends on the underlying shares.
Read the termination and change-of-control sections carefully. They spell out what happens to unvested units if you leave, if you’re let go, or if the company is acquired, and the treatment varies significantly from one company to the next.
How Vesting Works
Vesting is the moment the promise becomes stock. Most grants use one of three structures, sometimes in combination.
Time-Based Vesting
The most common design ties vesting to continued employment. A four-year grant often uses a one-year cliff: nothing vests for the first twelve months, then 25% vests in a single block on the anniversary of the grant date.2Justia. Restricted Stock Units Agreement with One-Year Cliff Vesting Under Bristol-Myers Squibb Company’s 2012 Stock Award and Incentive Plan After the cliff, the balance vests in equal monthly or quarterly installments. Other companies skip the cliff and use graded vesting from day one, releasing a small slice each month or quarter across the full vesting period.
Performance-Based Vesting
Some grants add operational or financial targets on top of the time requirement. Units may vest only if the company hits a revenue number, an earnings goal, or a stock-price threshold. If the target is missed, the units tied to that milestone may never vest, regardless of how long you’ve been at the company. The agreement defines the metrics and how partial achievement is handled.
Double-Trigger Vesting
Private and pre-IPO companies frequently require two separate events. The first trigger is time-based, meaning you serve out the schedule. The second is a liquidity event such as an IPO or acquisition. Both must occur before any units vest, so employees who satisfy the time requirement still hold unvested units until the company goes public or is bought. The structure lets private companies grant equity without saddling employees with a tax bill on shares they can’t sell.
What Happens to Unvested Units If You Leave
The default rule is simple: any units not yet vested on the date your employment ends are cancelled with no compensation.1SEC. Exhibit 10.12 – Brilliant Earth Group, Inc. 2021 Incentive Award Plan Restricted Stock Unit Award Grant Notice Shares that already vested and settled into your brokerage account before you left belong to you.
Many agreements carve out exceptions that accelerate vesting under specific circumstances:
- Death or disability. Unvested units often vest in full so the employee or their estate receives the shares.
- Retirement. Some plans allow full or partial acceleration if you meet age and service thresholds, for example age 55 with five years of service.
- Change of control. If the company is acquired and the buyer does not assume your grant, unvested units may vest in full. Even when grants are assumed, a subsequent termination without cause within a defined window (often 12 to 24 months) can trigger acceleration.
None of these are automatic. Check the agreement, and if you’re negotiating an exit, the treatment of unvested units is one of the most valuable terms on the table.
How RSUs Are Taxed at Vesting
Under Section 83 of the Internal Revenue Code, when property is transferred to you for services and your rights to it are no longer subject to a substantial risk of forfeiture, its fair market value (minus anything you paid for it) is included in your gross income.3Office of the Law Revision Counsel. 26 U.S. Code 83 – Property Transferred in Connection with Performance of Services For RSUs, that moment is the vesting date. The share price on that day, multiplied by the number of shares vesting, becomes wage income reported on your W-2 alongside your salary.
A common question: can you file a Section 83(b) election to accelerate income recognition when the stock is still cheap? No. That election applies only to property that has already been transferred but remains subject to forfeiture, which describes restricted stock rather than RSUs. Because no property changes hands until vesting, there’s nothing to elect on.
Federal Withholding
Employers treat vested RSU income as supplemental wages and withhold federal income tax at a flat 22%. Once your supplemental wages for the year exceed $1 million, the excess is withheld at 37%.4Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide These are withholding rates, not your actual tax rate. If your marginal bracket is higher than 22%, the withholding won’t cover what you owe, and you may need to make estimated tax payments during the year to avoid underpayment penalties.
Social Security and Medicare
RSU income is subject to FICA. Social Security tax runs 6.2% on earnings up to the 2026 wage base of $184,500, and Medicare tax is 1.45% with no cap.5Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates6Social Security Administration. Contribution and Benefit Base If your salary has already crossed the Social Security wage base by the time RSUs vest, no additional Social Security tax hits the RSU income. Medicare tax still applies to every dollar.
Higher earners also owe an Additional Medicare Tax of 0.9% on wages above $200,000 for single filers or $250,000 for married couples filing jointly.7Internal Revenue Service. Questions and Answers for the Additional Medicare Tax Employers begin withholding it once your wages pass $200,000 for the year, regardless of your filing status; joint filers reconcile any difference on the return.
State Taxes
Most states with an income tax also withhold on RSU income. States that set a specific supplemental wage rate range from roughly 1.5% to over 10%; others use regular withholding tables. If you moved between states during the vesting period, you may owe tax to more than one state based on where you worked while the units were vesting, not just where you lived on the vesting day.
How Vested Shares Are Delivered
The company has to satisfy the tax bill before it hands you shares. Most public companies use one of two methods:
- Sell-to-cover. All vested shares are released, then enough of them are immediately sold on the open market to cover taxes. You receive the net shares in your brokerage account.
- Net settlement, also called share withholding. The company holds back a portion of the vesting shares to cover taxes and deposits only the remainder in your account. No open-market sale occurs; the company pays the taxes in cash and keeps the withheld shares.
Either way, you end up with fewer shares than the number of RSUs that vested. If 100 RSUs vest and roughly 35% to 40% goes to taxes, expect to see 60 to 65 shares. A few companies let you pay withholding in cash and keep every share, but the option is uncommon.
Cost Basis: The Mistake That Costs People Money
This is where RSU holders most often overpay tax, sometimes years after the fact. The share price on the vesting day was already taxed as ordinary income on your W-2. That same price is your cost basis in the shares. When you later sell, your capital gain or loss is measured from that vesting-day value, not from zero.
For equity compensation granted after 2013, brokers are not required to include the income recognized at vesting when they report cost basis on Form 1099-B.8Internal Revenue Service. Instructions for Form 1099-B Box 1e may show zero or a figure that ignores the compensation already taxed. Report the sale using that unadjusted number and you’ll be taxed a second time on income you already paid tax on.
Fix this on Form 8949. Your correct basis is the vesting-day fair market value per share multiplied by the shares sold. Report the sale proceeds, enter the adjusted basis, and use the adjustment column to reflect the difference. The gain or loss is only the price change between vesting and sale.
Selling the Shares
Capital Gains Treatment
Once shares are in your account, any price movement from the vesting date forward is a capital gain or loss. The holding period starts on the vesting date. Sell within a year and the gain is short-term, taxed at ordinary rates. Hold longer than a year and you qualify for long-term capital gains rates,9Internal Revenue Service. Topic No. 409, Capital Gains and Losses which for 2026 are 0%, 15%, or 20% depending on taxable income.10Tax Foundation. 2026 Tax Brackets and Federal Income Tax Rates Most RSU holders land in the 15% band.
The Wash Sale Trap
If you sell RSU shares at a loss within 30 days before or after acquiring substantially identical stock, the wash sale rule disallows the loss.11Office of the Law Revision Counsel. 26 U.S. Code 1091 – Loss from Wash Sales of Stock or Securities Vesting counts as an acquisition. So if a new RSU tranche vests within the 61-day window around your loss sale, the IRS treats those newly vested shares as replacement stock and the loss is disallowed for the year. The disallowed amount is added to the basis of the new shares, so it isn’t gone forever, but you can’t claim it now. If you have multiple vesting dates on the calendar, plan any tax-loss sales around them.
Blackout Periods
Owning shares doesn’t mean you can sell whenever you like. Public companies typically close the trading window for a stretch before each quarter ends and reopen it a day or two after earnings are released. Blackouts commonly begin 11 to 25 days before quarter-end. During a blackout you generally cannot sell, though share withholding on RSUs that happen to vest inside the window is usually still permitted.
Executives, directors, and other employees with access to material nonpublic information face further limits and often use a Rule 10b5-1 trading plan, a preset schedule that executes trades automatically at times when the participant is not in possession of inside information.
Private Company RSUs
Vesting at a private company creates a specific problem: you owe tax on the fair market value of shares you cannot sell. Section 83(i) offers a possible escape by letting qualifying employees defer the income tax on vested RSU shares for up to five years.
The requirements are strict. The company must be an “eligible corporation,” meaning its stock has never been publicly traded and it maintains a written plan granting stock options or RSUs to at least 80% of its U.S. employees with the same rights and privileges.12Internal Revenue Service. Guidance on the Application of Section 83(i) Notice 2018-97 Employees working under 30 hours per week are excluded from the 80% count, and the plan can’t grant options to some workers and RSUs to others; the same type of grant must apply across the eligible group.
Not every employee qualifies even when the company does. You cannot elect if you’re a current or former CEO or CFO, one of the four highest-paid officers, or someone who has held 1% or more of the company at any point in the prior 10 years. If you elect, your shares are held in escrow until the company recovers the withholding it owes. The deferral ends at five years or earlier if the stock becomes publicly tradable, you leave, or the shares are transferred. Deferral delays the tax; it does not reduce it.
Section 409A
Section 409A governs nonqualified deferred compensation, and RSUs can fall inside its rules if they are structured to settle at a time other than promptly upon vesting.13Office of the Law Revision Counsel. 26 U.S. Code 409A – Inclusion in Gross Income of Deferred Compensation Under Nonqualified Deferred Compensation Plans A violation triggers immediate taxation of all deferred amounts plus a 20% penalty and interest. Most companies avoid this by settling RSUs promptly on vesting, which qualifies for a short-term deferral exemption. If your agreement lets you choose when shares are delivered, confirm the plan has been drafted with 409A in mind.
Dividend Equivalent Rights
Because you don’t own shares before vesting, you don’t collect dividends the company pays during that period. Some grants include dividend equivalent rights, which credit you with cash equal to the dividends paid per share on each unvested RSU.14SEC. MYR Group Inc. Restricted Stock Units and Dividend Equivalents Award Agreement The credits usually accumulate without interest and are paid in cash when the underlying shares are delivered. If the RSUs are forfeited before vesting, the accumulated credits go with them. Not every grant includes these rights, so check yours.