How are Restricted Stock Units (RSUs) Taxed?
June 06, 2025Restricted Stock Units (RSUs) are a form of equity compensation. They are awarded as company stock and can be viewed as part of an employee’s overall compensation package. How this form of compensation is taxed can be tricky, so it is important to know the ins and outs so that there are no surprises come tax time.
RSU Basics
RSUs are typically awarded when an employee starts their job and/or on a regular basis at the discretion of the employer. When RSUs are awarded, the employee does not own them yet. Ownership comes according to a predetermined timetable known as a vesting schedule. For example, an award of 1,600 shares may vest 100 shares per quarter for the next 16 quarters (four years). As shares vest, employees can sell the shares as needed to generate cash. The selling of shares may be subject to restricted trading windows, so employees should check with their employer on that. Here is a breakdown of when and how employees are taxed on RSUs:
Taxation At the Time of Award
Unless your RSUs are immediately vested, they are generally not taxed at this time.
Taxation At the Time of Vesting
The vesting of your shares is a taxable event. The value of the shares that vest is taxed as ordinary income in the year that the vesting occurs, even if you don’t sell the shares. For example, if 100 shares vest on May 15th and the value per share is $50, $5,000 (100 shares x $50 per share) will be added as taxable income for the year.
The amount of federal taxes owed depends on your tax bracket which is determined by your overall tax situation for the year. Depending on your state of residence, state and local taxes may be owed as well. Note that the employer may automatically sell a certain amount of shares to be used for tax withholding at the federal and state levels, if applicable. Check with your employer to see if the number of shares sold for withholding can be changed to reflect your anticipated overall tax situation.
Taxation At the Time of Sale
The sale of vested RSUs is a taxable event as well. You will have to pay capital gains tax on any appreciation of the value of the stock from the time of vesting to the time of sale. Building on the example above, if the 100 shares are later sold for $60 per share (a total value of $6,000), you will owe capital gains tax on the $1,000 of appreciation (i.e., $6,000 sale value – $5,000 cost basis).
There are two types of capital gains:
Short-term capital gain. If the time between vesting and selling is one year or less, it will be a short-term capital gain and taxed as ordinary income for the year.
Long-term capital gain. If the time between vesting and selling is more than one year, it will be considered a long-term capital gain and will be subject to long-term capital gains tax rates.
Generally, less taxes are owed with a long-term capital gain, but you should always compare short- and long-term gains to identify which sales would reduce tax liability most effectively. If the value of the shares when sold is less than the value when they vested, this will incur a capital loss that may be used to offset capital gains in the same year (but be aware of the wash sale rule).
Pro Tip: If you don’t intend to hold on to them very long, consider selling shares that vest immediately to minimize taxes.
If you are fortunate enough to receive RSUs as a form of stock compensation, it’s important to understand how they are taxed as part of an overall tax planning strategy. As with many tax matters, it’s a good idea to consult with a tax professional to get advice on your specific tax situation.