Restricted stock is company stock granted to you as part of your compensation, with conditions that keep you from freely selling or transferring the shares until you meet certain requirements. It comes in two main forms, restricted stock awards (RSAs) and restricted stock units (RSUs), and the differences between them drive nearly every other question, including when you owe tax, whether you can vote your shares, and what happens if you leave before vesting.
RSAs and RSUs Are Not the Same Thing
A restricted stock award transfers actual shares to you on the grant date. You become a shareholder immediately, but the shares come with strings attached: if you leave the company before vesting, you forfeit some or all of them back. The stock is yours, but the company holds the key until you satisfy the vesting conditions.
A restricted stock unit is different. An RSU is a promise from your employer to deliver shares, or the equivalent cash value, at a future date once vesting conditions are met. You don’t own any stock when RSUs are granted. No shares are set aside, and you have no ownership stake in the company until the units convert into shares at vesting. Under the tax code, the distinction matters because RSAs involve a transfer of property at grant, while RSUs do not transfer anything until later.1Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection With Performance of Services
Because RSA holders are actual shareholders from day one, they can typically vote at shareholder meetings and receive dividends like any other stockholder, even while the shares remain restricted. RSU holders have no shareholder rights before vesting. Some employers offer dividend equivalents on RSUs, which are cash payments or additional units equal to the dividends paid on common stock. These are often held until the RSUs vest and paid out with the shares, and if you forfeit the RSUs, the dividend equivalents are usually forfeited too.
How Vesting Works
Vesting is the process by which restrictions are removed and you gain full ownership. Your grant agreement spells out the schedule, and a few structures are common.
- Cliff vesting: all shares vest at once after a set period, such as three or four years. Leave before the cliff date and you forfeit everything.
- Graded vesting: shares vest in portions over time, such as 25% per year over four years, so you gain partial ownership each year.
- Performance-based vesting: shares vest only if the company hits specific goals, such as revenue targets, earnings benchmarks, or a designated stock price. Miss the target within the defined period and the shares are forfeited.
Some plans use double-trigger vesting, which requires two separate events. The typical setup is a change in company control (an acquisition, for example) plus an involuntary termination. If the company is acquired but you keep your job, the shares don’t accelerate. If you’re laid off without a change in control, they don’t accelerate either. This structure is common in executive agreements and at private companies granting RSUs, where the first trigger is often an IPO or acquisition and the second is continued employment.
What Happens to Unvested Stock When You Leave
If you leave before all your shares have vested, whether you resign, get laid off, or are fired, you forfeit the unvested portion. Only shares that have already vested as of your departure date belong to you. With vested RSAs, you own the stock outright. With vested RSUs, the shares have already been delivered to your brokerage account.
The unvested portion disappears. For RSAs, the company typically repurchases the unvested shares at the price you originally paid, which is often nothing. For RSUs, any unvested units are canceled. This is where most of the financial pain from a poorly timed job change happens. Six months from a major vesting event, walking away means leaving those shares on the table.
Many equity plans accelerate vesting on death or disability. Retirement provisions vary widely. Some plans also include clawback provisions that let the company reclaim vested equity for serious misconduct such as fraud, embezzlement, or violation of non-compete agreements. The specifics are governed entirely by your grant agreement and your company’s equity plan, so read both.
How Restricted Stock Is Taxed at Vesting
When your restricted stock vests, the IRS treats the fair market value of the shares, minus anything you paid for them, as ordinary compensation income. For RSUs, this happens when the shares are delivered. For RSAs where you did not make a Section 83(b) election, this happens when the forfeiture restrictions lapse.1Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection With Performance of Services
That vesting income is subject to federal income tax, state income tax if applicable, Social Security tax at 6.2% up to the annual wage base, and Medicare tax at 1.45%. High earners may also owe the 0.9% Additional Medicare Tax on wages above $200,000 for single filers.
Your employer withholds taxes on this income as supplemental wages. For 2026, the federal flat withholding rate on supplemental wages is 22%. If your total supplemental wages from a single employer exceed $1 million during the calendar year, everything above that threshold is withheld at 37%.2Internal Revenue Service. Publication 15 (2026), (Circular E), Employers Tax Guide
Here’s the catch that trips people up. The 22% rate is an estimate, not your actual tax. If your marginal rate is higher, withholding won’t cover the full liability, and you’ll owe the difference at filing. If the gap is large and you haven’t made estimated tax payments, an underpayment penalty is possible. You can generally avoid that penalty if you owe less than $1,000 at filing or if your total withholding and estimated payments cover at least 90% of the current year’s tax or 100% of the prior year’s tax.3Internal Revenue Service. Topic No. 306, Penalty for Underpayment of Estimated Tax
Covering the Withholding
When a large block vests, the tax bill can be substantial. Most employers offer two main approaches. Under sell-to-cover, the company’s brokerage partner automatically sells enough of your vesting shares to cover the withholding, and you keep the rest. Under net settlement, the company withholds a portion of the vesting shares outright and never delivers them, with a similar effect but no market transaction. Some employers also let you pay the withholding in cash so you keep all your shares, which can make sense if you want full exposure and have the liquidity. Whichever method applies, withholding only covers an estimate. Run the numbers before your next vesting date, not after.
The Section 83(b) Election for RSA Holders
The Section 83(b) election is available only for RSAs. Because RSUs don’t transfer actual property at grant, there’s nothing for the election to attach to. If you hold RSUs, this section doesn’t apply to you.
For RSA recipients, an 83(b) election lets you pay income tax on the shares at their grant-date value instead of waiting until vesting. You report the difference between what you paid for the shares and their fair market value on the grant date as ordinary income immediately.4Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection With Performance of Services – Section 83(b)
The potential upside is significant at early-stage companies. If you receive RSAs when the stock is worth $0.50 per share and it’s worth $20 per share when they vest four years later, the election means you paid ordinary income tax on $0.50 per share instead of $20. The appreciation between grant and vesting is removed from ordinary income treatment entirely. When you eventually sell, the gain from $0.50 to the sale price can qualify for long-term capital gains rates if you’ve held the shares more than a year.
The risks are real. If the stock price drops after you make the election, you’ve paid tax on value you never received, and you can’t get that tax back. If you forfeit the shares by leaving before vesting, you don’t get a deduction for the forfeiture. The tax you paid is simply gone. The election makes the most sense when the current value is low and you have strong conviction the company will grow, which is why it’s most commonly used by startup founders and early employees receiving shares at minimal valuations.
The filing deadline is strict. You must submit the election within 30 days of the grant date, with no extensions and no exceptions. Miss it by a day and the election is permanently unavailable for that grant.5Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection With Performance of Services – Section 83(b)(2) The IRS released Form 15620 in late 2024 to standardize the election, and as of 2025 the agency accepts electronic submission through its online portal. You must also provide a copy to your employer’s payroll department. Once filed, the election cannot be revoked without IRS consent, which is almost never granted.
Capital Gains When You Sell
Once your shares vest, or once you’ve recognized income via an 83(b) election, any further increase in value is a capital gain rather than ordinary income. The rate depends on how long you hold the shares after the relevant start date.
For RSUs, the capital gains holding period begins on the delivery date, which is typically the vesting date. For RSAs without an 83(b) election, it also starts at vesting. For RSAs with an 83(b) election, the holding period starts at the grant date, which gives you a head start. Hold for more than one year from the applicable start date and the gain qualifies for long-term capital gains rates.6Internal Revenue Service. Topic No. 409, Capital Gains and Losses
Long-term capital gains are taxed at 0%, 15%, or 20% depending on your taxable income and filing status. For the 2025 tax year, the 0% rate applies to single filers with taxable income up to $48,350 and married couples filing jointly up to $96,700. The 20% rate kicks in above $533,400 for single filers and $600,050 for joint filers. Most people fall in the 15% bracket. Short-term gains on shares held one year or less are taxed as ordinary income at your regular rate.
High-income taxpayers face an additional 3.8% Net Investment Income Tax on capital gains if their modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly). These thresholds are not adjusted for inflation, so they catch more taxpayers every year.7Internal Revenue Service. Net Investment Income Tax
Selling Restrictions After Vesting
Even after shares vest, selling them isn’t always straightforward. SEC Rule 144 governs the resale of restricted securities and shares held by company insiders such as officers, directors, and large shareholders. If the company is a publicly reporting entity, you must hold the shares for at least six months from the date you acquired them before selling under Rule 144. If the company does not file reports with the SEC, the required holding period is one year.8eCFR. 17 CFR 230.144 – Persons Deemed Not to Be Engaged in a Distribution and Therefore Not Underwriters
Most publicly traded companies also impose their own trading restrictions through blackout periods and insider trading policies. You’ll typically be limited to designated trading windows that open after quarterly earnings announcements. Violating these policies can trigger serious legal consequences even if your shares are otherwise freely tradable.
If Your Employer Is Private
At a private company, restricted stock carries an extra complication: there’s no public market for your shares. Even fully vested stock is difficult to sell because there’s no exchange where buyers and sellers meet. Your shares may sit in your account for years, generating tax obligations without producing cash.
This is why many private companies use double-trigger RSUs, where the first trigger is the service-based vesting requirement and the second is a liquidity event such as an IPO or acquisition. The RSUs convert to actual shares only when both conditions are met, which avoids a situation where employees owe income tax on shares they can’t sell. Private companies must also obtain independent valuations, commonly called 409A valuations, to establish the fair market value of their stock. Those appraisals are valid for up to 12 months, or until a material event such as a new funding round changes the company’s value, and the price they set determines the tax basis for grants during that period.