A sell to cover RSU transaction is the automatic sale of just enough of your vesting restricted stock units to pay the taxes owed on them, with the remaining shares deposited into your brokerage account as fully owned stock. It’s the most common default election in employer equity plans because it settles the immediate tax bill without requiring cash out of your pocket. The catch is that the withholding collected at vesting is often lower than what you’ll actually owe at filing time, and the way the sale gets reported on tax forms sets a trap that leads many employees to pay tax on the same income twice.
How the Transaction Works at Vesting
When your shares vest, the employer’s brokerage splits them into two groups. One group is sold on the open market to generate cash for tax withholding and any transaction fees. The rest lands in your account, already cleared of the immediate tax obligation.
Say 200 RSUs vest when the stock trades at $50, giving you $10,000 in taxable income. If combined federal, state, and FICA withholding comes to 35%, the broker sells 70 shares (roughly $3,500) and deposits the remaining 130 shares. You never write a check. The trade happens automatically on or shortly after the vesting date.
The exact share count depends on your tax bracket, state withholding rate, the stock price when the trade executes, and any plan fees. Because the broker sells whole shares to cover a dollar amount, a small cash residual almost always lands in your account.
Other Ways to Handle the Tax Bill
Most equity plans offer at least two or three election methods. Sell to cover is the default, but knowing the alternatives helps you pick with intent.
- Same-day sale: the broker sells all the vesting shares. You receive cash after taxes rather than stock. Useful if you’d rather diversify immediately or need the money.
- Cash transfer: you pay the tax out of pocket and keep every share. Preserves the most equity but requires liquid cash on the vesting date, which can be significant for large grants.
- Net share withholding: the company withholds shares directly rather than selling them on the market. From your side it looks identical to sell to cover. Not every employer offers it.
Sell to cover splits the difference. You keep most of your shares without needing cash on hand, and you give up a slice of equity to the tax bill.
What Gets Withheld
The IRS classifies vesting equity as supplemental wages. Under IRS Publication 15, federal income tax is withheld at a flat 22% on supplemental wages up to $1 million in a calendar year. Above $1 million, the rate on the excess jumps to 37%.1Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide
FICA also comes out: 6.2% Social Security and 1.45% Medicare on the employee side.2Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates Social Security stops once total wages hit $184,500 in 2026.3Social Security Administration. Contribution and Benefit Base If salary alone already exceeds that cap before vesting, no more Social Security tax is withheld on the equity. Medicare has no cap.
There’s also the Additional Medicare Tax: an extra 0.9% on wages above $200,000 for single filers and $250,000 for married filing jointly.4Internal Revenue Service. Questions and Answers for the Additional Medicare Tax Employers begin withholding it once cumulative wages cross $200,000 regardless of filing status. If vesting pushes you over that line, expect it on your pay statement.
The fair market value of the vested shares appears in Box 1 of your W-2 as ordinary income.5Internal Revenue Service. U.S. Taxation of Stock-Based Compensation Received by Nonresident Aliens For nonqualified stock options, the taxable event is at exercise, and the taxable amount is the spread between the market price and your strike price.6Internal Revenue Service. Topic No. 427, Stock Options
Why the Withholding Usually Isn’t Enough
The 22% flat rate is where most people get burned. It’s a withholding rate, not your actual tax rate. If your RSU income pushes you into the 32% or 35% federal bracket, what came out at vesting won’t cover what you owe. For 2026, the 32% bracket starts at $197,300 for single filers and 35% kicks in at $394,600.7Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 Employees with six-figure RSU packages routinely land in those brackets, and the gap between 22% withheld and 32–35% owed can run into the thousands.
State income tax adds to the shortfall. States that tax income typically withhold between roughly 1.5% and over 10% on supplemental wages, while nine states impose no income tax at all. Even in moderate-tax states, the combined federal and state under-withholding can leave a 10 to 15 percentage-point gap on a large vesting.
If you expect to owe at least $1,000 at filing time after withholding and credits, the IRS expects quarterly estimated payments or you risk an underpayment penalty. The safe harbor avoids the penalty if total withholding and estimated payments cover at least 90% of your 2026 liability, or 100% of what you owed for 2025, whichever is smaller. If 2025 adjusted gross income exceeded $150,000, that second figure rises to 110%.8Internal Revenue Service. 2026 Form 1040-ES, Estimated Tax for Individuals The IRS charges 7% annual interest on underpayments as of early 2026.9Internal Revenue Service. Quarterly Interest Rates
Run the numbers in the quarter your shares vest. If your marginal rate is meaningfully above 22%, either bump up your W-4 withholding for the rest of the year or make an estimated payment by the next quarterly deadline. Waiting until April to find the gap is the most expensive path.
Reporting the Sale Without Paying Tax Twice
This is where the biggest filing mistake happens. Your W-2 already includes the full fair market value of the vested shares as ordinary income. Separately, your broker sends a 1099-B reporting the shares sold in the sell-to-cover transaction. Brokers frequently report a cost basis of $0 on that 1099-B, because from their perspective you didn’t pay anything for the RSU shares.
If you enter the 1099-B numbers straight into your return without adjusting the basis, you pay tax on the same income twice: once as wages on the W-2, and again as a capital gain on the 1099-B. To fix it, adjust the cost basis on Form 8949 to reflect the fair market value at vesting, using adjustment code “B” in column (f) to tell the IRS the reported basis was incorrect.10Internal Revenue Service. 2025 Instructions for Form 8949 Your broker’s supplemental information sheet lists the correct adjusted basis, so keep that document alongside the 1099-B.
The same logic applies to nonqualified stock options. The 1099-B basis may not include the income already recognized at exercise, so you increase the reported basis by the amount reflected on your W-2.10Internal Revenue Service. 2025 Instructions for Form 8949 Skipping this adjustment is probably the single most common tax filing error with equity compensation, and it always results in overpaying.
Cost Basis on the Shares You Keep
The shares still sitting in your brokerage account after the sell-to-cover transaction have a cost basis equal to the fair market value on the vesting date. That’s the price the IRS already taxed you on as ordinary income. From here, any price movement is a capital gain or loss, not additional ordinary income.
Sell for more than basis, you have a gain. Sell for less, you have a loss.11Internal Revenue Service. Topic No. 409, Capital Gains and Losses Holding period matters. Selling within one year of vesting is short-term, taxed at ordinary income rates. Holding longer than a year qualifies for long-term rates, which top out at 20% for the highest earners in 2026 and drop to 0% for single filers with taxable income under $49,450.
For the shares sold during the sell-to-cover transaction itself, the sale price and the basis are nearly identical because the sale happens on or very close to the vesting date. The capital gain or loss is typically just a few cents per share from intraday price movement between valuation and execution. Small, but still reportable.
Watch for the Wash Sale Rule
If you sell shares at a loss within 30 days before or after acquiring substantially identical stock, the IRS disallows the loss under the wash sale rule.12Office of the Law Revision Counsel. 26 U.S. Code 1091 – Loss From Wash Sales of Stock or Securities RSU vestings count as acquisitions. Sell company stock at a loss, and if more RSUs vest within the 30-day window, the loss is disallowed. The disallowed amount adds to the basis of the newly acquired shares, so it’s not gone permanently, but you can’t use it on this year’s return.
The rule applies across all your accounts, including retirement accounts and your spouse’s holdings. If you’re planning to harvest a loss on company stock, check whether any vesting dates fall within the 61-day window that runs from 30 days before through 30 days after the sale. RSUs vest on fixed schedules, so this is something you can plan around.
Election Windows and Blackout Periods
The election window to pick sell to cover typically opens well before the vesting date. Some plans require you to elect 30 to 60 days in advance. Miss the window and most plans default to either sell to cover or same-day sale, depending on plan terms. Read your plan documents early rather than scrambling at the last minute.
Many companies also impose trading blackout periods around earnings announcements, during which employees with access to material nonpublic information cannot trade company stock. These restrictions affect your ability to change a sell-to-cover election or modify a standing trading plan. Automatic sell-to-cover transactions at vesting are generally structured as pre-arranged plans under SEC Rule 10b5-1, which shields them from insider trading concerns as long as the plan was set up while the trading window was open. Modifying or canceling that plan counts as terminating the old one and adopting a new one, which cannot be done during a blackout.