When stock vests, you have three real choices: sell all of it, hold it as an investment, or sell just enough shares to cover the tax withholding and keep the rest. Deciding what to do with vested stock comes down to how concentrated your net worth already is in your employer, what tax bracket you land in this year, and whether you have genuine reason to believe the share price will keep climbing. Whichever path you pick, the income tax bill on the vesting itself is already locked in — that part isn’t a choice — so the real decision is about what happens to the shares after that.
The Tax That Already Happened at Vesting
The IRS treats the fair market value of your shares on the vesting date as ordinary wage income. Your employer reports it on your W-2 and withholds federal income tax, state income tax where applicable, Social Security tax at 6.2%, and Medicare tax at 1.45%.1Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates If 200 shares vest at $250 each, you owe income tax on $50,000, exactly as if your employer had handed you a $50,000 bonus.
Two related taxes catch people out. Social Security tax only applies up to $184,500 in total wages for 2026, so if your salary already exceeds that cap, the vesting income avoids the 6.2%.2Social Security Administration. 2026 Cost-of-Living Adjustment (COLA) Fact Sheet But once total compensation crosses $200,000 for single filers or $250,000 for married filing jointly, an extra 0.9% Additional Medicare Tax applies on wages above that line.3Internal Revenue Service. Questions and Answers for the Additional Medicare Tax
That’s the tax at vesting. Whatever you do with the shares next only changes the capital gains side of the equation.
Sell Everything Right Away
Selling every share the moment it vests treats equity compensation the way most people treat a cash bonus. The income tax hit exists regardless, so an immediate sale creates almost no additional tax event — the only gain or loss is whatever tiny price movement happens between the vesting timestamp and your click on “sell.”
The strongest reason to do this is concentration risk. Your salary, health insurance, retirement match, and career already depend on your employer. Stacking a large equity position on top of that means a single bad earnings report can damage your income, your job security, and your investment portfolio at once. Selling immediately removes that overlap and lets you redirect the proceeds into a diversified portfolio, high-interest debt, or a tax-advantaged retirement account.
Put it this way: most people wouldn’t take a $50,000 cash bonus and voluntarily put all of it into their employer’s stock. Holding shares that vest is the same choice, made by default.
Hold for Long-Term Capital Gains
Holding makes sense when you have genuine conviction in the company’s growth and your overall portfolio isn’t already dominated by that one stock. Once you’ve held past one year from the vesting date, any gain qualifies for long-term capital gains rates of 0%, 15%, or 20% depending on taxable income, rather than ordinary rates that can reach 37%.4Internal Revenue Service. Topic No. 409, Capital Gains and Losses For 2026, a single filer pays 0% on long-term gains up to $49,450 of taxable income, 15% up to $545,500, and 20% above that.5Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
The holding-period clock starts the day after the shares settle in your brokerage account, not the original grant date. Shares that vest on March 15, 2026 need to be held until at least March 16, 2027 to qualify. Sell on March 15 and the entire gain is short-term, taxed at your full ordinary rate.
One more tax layer to know about if you hold and later sell for a big gain: if your modified adjusted gross income exceeds $200,000 single or $250,000 married filing jointly, a 3.8% net investment income tax applies to the lesser of your net investment income or the amount your MAGI exceeds the threshold.6Internal Revenue Service. Topic No. 559, Net Investment Income Tax Capital gains on vested stock count as investment income for this calculation.
Individual stocks are far more volatile than a diversified index fund, and even well-run companies can post 30–50% drawdowns in a bad quarter. If you hold, set a personal concentration ceiling. Many advisors suggest no more than 10–15% of investable assets in any single stock, and selling down when new vesting events push you past that line.
Sell to Cover
Sell-to-cover is the default option at most companies, and it splits the difference. Your broker automatically sells enough shares to satisfy the tax withholding and deposits the rest into your account. On a 200-share vest at $250 each, with combined federal and state withholding around 35%, the broker sells roughly 70 shares and you keep about 130.
Employers typically withhold at a flat 22% federal rate on supplemental wages under $1 million per calendar year. Above $1 million in supplemental wages, the rate on the excess jumps to 37%.7Internal Revenue Service. Publication 15 (2026), (Circular E), Employers Tax Guide State withholding sits on top of that, from zero in no-income-tax states to more than 10% in California.
Sell-to-cover is popular because it feels automatic and never requires cash out of pocket. But it leaves you holding a concentrated position by default, and the withholding rate almost certainly undertaxes anyone in a bracket above 22%.
Why the 22% Withholding Usually Isn’t Enough
This is where most people with equity compensation get hit at tax time. The 22% flat supplemental rate is a flat estimate, not a match to your actual bracket. If your salary puts you in the 32% or 37% bracket — common for anyone receiving meaningful RSU grants — the 22% withheld at vesting falls well short. For 2026, the 32% bracket begins at $201,775 for single filers and 37% starts above $640,600.5Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
Consider an employee with $180,000 in salary who vests into $80,000 of stock. Total income is $260,000, well into the 32% bracket. The employer withholds 22% on the stock, or $17,600, but the actual marginal tax on that income is 32%, or $25,600. That’s an $8,000 shortfall before state tax, Additional Medicare Tax, or the net investment income tax on any gains. The April surprise can easily reach five figures.
You can head this off with quarterly estimated tax payments or by adjusting your W-4 to pull extra withholding from regular paychecks. The IRS won’t penalize you if you’ve paid at least 90% of the current year’s tax liability or 100% of last year’s total tax, whichever is smaller. If your prior-year adjusted gross income was over $150,000, the safe harbor rises to 110% of last year’s tax.8Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty Running a mid-year projection when a large vesting event is coming is one of the highest-value things you can do with equity compensation.
The Cost Basis Mistake That Taxes You Twice
The single most expensive paperwork error in equity compensation is paying tax twice on the same income, and it happens constantly. When RSUs vest, the fair market value is reported as wages on your W-2 and you pay income tax on it. That value also becomes your cost basis in the shares — essentially what you “paid” for them. When you sell, capital gains tax should apply only to the difference between the sale price and that basis.
The trap is that your broker’s Form 1099-B sometimes reports $0 as the cost basis, or reports it incorrectly.9Internal Revenue Service. About Form 1099-B, Proceeds from Broker and Barter Exchange Transactions If you copy those numbers straight into your return without adjustment, the IRS sees the entire sale proceeds as gain. You end up paying capital gains tax on money you already paid income tax on at vesting. On a $50,000 vesting event that you sell immediately, this can cost $10,000 or more in unnecessary tax.
Always check the cost basis on your 1099-B against the fair market value on your W-2 for the vesting date. If the 1099-B shows $0 or a figure that doesn’t match, adjust the basis on Schedule D and Form 8949. Keep the vesting confirmations from your brokerage as backup. Fixing this after filing requires an amended return and months of waiting.
Watch for Wash Sales Between Vesting Events
If you sell vested shares at a loss and receive new shares through another vesting event within 30 days before or after the sale, the IRS may disallow the loss under the wash sale rule.10Office of the Law Revision Counsel. 26 USC 1091 – Loss From Wash Sales of Stock or Securities The rule blocks a capital loss deduction when you acquire “substantially identical” stock in the 61-day window around the sale.
This trips up employees with quarterly or monthly vesting schedules. Say shares vested at $300 and the stock has since dropped to $250. You sell to harvest the loss, but another batch vests within 30 days. The IRS treats the newly vested shares as a replacement purchase, and your loss is disallowed for the current tax year. The disallowed amount gets added to the cost basis of the new shares rather than vanishing, but you lose the current-year deduction. Before selling at a loss, check your vesting calendar.
Before You Can Actually Trade
Even after your shares vest, you may not be able to sell right away. Most publicly traded companies impose blackout periods that prohibit trading around earnings announcements and other material events. Typical blackouts close trading 10 to 25 days before the end of a fiscal quarter and reopen a couple of days after earnings are released. These aren’t required by law, but companies use them to reduce insider trading risk.
Senior executives and directors face more. SEC Rule 10b5-1 lets insiders set up pre-arranged trading plans during periods when they don’t have material nonpublic information, and directors and officers must observe a cooling-off period before trades under a new plan can execute — the later of 90 days after adoption or two business days after the next quarterly earnings disclosure.11U.S. Securities and Exchange Commission. Rule 10b5-1 – Insider Trading Arrangements and Related Disclosure Non-officer employees who adopt a plan face a 30-day cooling-off period.
If you’re an affiliate — generally officers, directors, or 10%+ shareholders — SEC Rule 144 also limits how many shares you can sell in any three-month period.12U.S. Securities and Exchange Commission. Rule 144 – Selling Restricted and Control Securities Regular employees who aren’t affiliates don’t face those volume caps, but company-imposed blackouts still apply.
If You Have Stock Options Instead
Everything above applies primarily to restricted stock units. Stock options work differently because you choose when to exercise, and the treatment depends on which kind you hold.
Nonqualified stock options are the simpler case. When you exercise, the spread between your strike price and the current market price counts as ordinary income and shows up on your W-2 like RSU vesting income. If your strike is $50 and the stock trades at $120, that $70 per share is taxed as wages. Any further appreciation after exercise follows the standard capital gains rules.13Internal Revenue Service. Topic No. 427, Stock Options
Incentive stock options get preferential treatment if you hold the shares at least two years after the grant date and at least one year after exercise.14Office of the Law Revision Counsel. 26 USC 422 – Incentive Stock Options Meet both, and the whole gain from strike to sale is long-term capital gain. Sell earlier, and part of the gain is reclassified as ordinary income. The complication with ISOs is the alternative minimum tax: exercising adds the spread to your income as an AMT preference item even if you don’t sell a share, and a large exercise can produce a substantial AMT bill in the exercise year. Run the AMT calculation before you exercise.