RSUs: When They Are Taxed and What Happens When You Sell the Shares

Restricted stock units can create two separate tax events.

The first happens when the award becomes compensation.

The second happens when the resulting shares are sold.

Keeping those events separate is the key to understanding RSU taxation.

An RSU is not restricted stock

A standard RSU is generally a contractual right to receive stock or cash in the future. The employee does not normally own the underlying shares at grant.

That makes an RSU different from actual restricted stock transferred to an employee subject to vesting restrictions.

For ordinary RSUs, Section 83(i)(7) also prevents treating the unit itself like property transferred under the standard Section 83 regime.

That is why an ordinary RSU generally is not something an employee can place under an 83(b) election.

When are conventional RSUs taxed?

For a conventional stock-settled RSU, the practical federal income-tax event generally occurs when the award settles and shares are delivered after the applicable vesting conditions have been satisfied.

Suppose 1,000 RSUs settle when the stock is worth $20 per share.

The compensation amount is:

1,000 × $20 = $20,000

That $20,000 generally enters wage income.

The employee now owns stock worth $20,000.

That transition matters because the next change in value belongs to the stock-sale calculation rather than the original compensation event.

Vesting and settlement are not always the same date

Many public-company RSUs settle when they vest.

But the concepts are not identical.

An award can satisfy its service condition while payment or share delivery occurs later.

When settlement is delayed, the analysis can move into nonqualified deferred-compensation rules under Section 409A.

The short-term-deferral exception can also matter when payment occurs within the applicable 2½-month period after the right is no longer subject to a substantial risk of forfeiture.

FICA timing can follow a separate rule under Section 3121(v)(2), which is another reason not to treat “vesting,” “income-tax settlement,” and “payroll-tax timing” as interchangeable concepts.

What is the cost basis of RSU shares?

For a conventional stock-settled RSU, the amount included in compensation generally becomes the tax basis of the shares received.

Using the example above:

Compensation recognized: $20,000

Stock basis: generally $20,000

If the employee later sells those shares for $25,000:

$25,000 proceeds − $20,000 basis = $5,000 capital gain

The original $20,000 should not be taxed again as capital gain.

When does the holding period begin?

The stock holding period generally begins when the employee actually acquires the shares.

That date matters because the later gain or loss can be short-term or long-term depending on how long the stock is held before sale.

Broker basis may not tell the whole story

Compensatory equity creates a recurring reporting problem: broker basis reporting does not always incorporate every amount that belongs in substantive tax basis.

A taxpayer should therefore reconcile:

• the RSU settlement record;
• Form W-2;
• Form 1099-B;
• any supplemental broker statement.

Do not assume a blank, zero, or incomplete broker basis means the employee has zero tax basis.

Net settlement and sell-to-cover are not the same transaction

This distinction is important.

In a true net settlement or employer share-withholding arrangement, the employer retains shares as part of settling the award and satisfying withholding obligations.

Those retained shares are not automatically a taxable stock sale by the employee.

A broker sell-to-cover is different.

If the employee acquires the gross shares and a broker then sells some of those shares to fund withholding, an actual stock disposition has occurred.

That sale can create a capital gain or loss, even if it occurs immediately and the result is close to zero.

Do not turn every withholding-by-shares transaction into a Form 1099-B stock sale. Determine whether shares were actually acquired and sold.

Withholding is not the final tax calculation

RSU compensation can be treated as supplemental wages.

The amount withheld by payroll does not establish the employee's final federal tax liability.

A large RSU settlement can therefore create additional tax due even when the employer correctly applied the withholding rules.

See Equity Compensation Withholding: Why the Amount Withheld May Not Equal Your Tax.

Multi-state RSUs

An employee can receive an RSU grant in one state, perform services in several states during the vesting period, move before settlement, and sell the stock after another move.

The compensation component and later capital gain can therefore require separate state analyses.

There is no national RSU sourcing formula.

See Multi-State Equity Compensation: Which State Taxes RSUs, Options, and Stock Sales?

Common RSU mistakes

Watch for:

• treating an RSU as already-owned restricted stock;
• attempting an 83(b) election on an ordinary RSU;
• assuming vesting and settlement must always occur simultaneously;
• using zero basis for shares created by RSU compensation;
• treating employer share withholding as an automatic stock sale;
• failing to report an actual broker sell-to-cover disposition;
• treating withholding as the final tax liability;
• assuming the settlement state is the only state that can tax the compensation.

Related pages

• Equity Compensation Cost Basis: How Double Tax Reporting Happens — follow the compensation amount into stock basis.
• Equity Compensation Withholding: Why the Amount Withheld May Not Equal Your Tax — understand the payroll side of an RSU settlement.
• Multi-State Equity Compensation: Which State Taxes RSUs, Options, and Stock Sales? — analyze compensation earned across jurisdictions.
• Restricted Stock: Vesting, Compensation Income, and Cost Basis — compare RSUs with actual stock transferred before vesting.