RSUs Explained: How Your Stock Comp Is Taxed

By the ReckonMoney Team · Updated June 25, 2026 · 6 min read

Here's the one thing to know about restricted stock units: the moment your RSUs vest, the IRS treats those shares as ordinary income — exactly like cash salary. Their full value lands on your W-2 and gets taxed at your regular rate, whether you sell the shares or not. Understanding that single fact explains almost everything about why your RSU paycheck looks the way it does.

What RSUs actually are

An RSU is a promise from your employer to give you a set number of company shares once you've earned them — usually by sticking around. They typically vest on a schedule: a chunk after one year, then smaller pieces each quarter or month after that. Until shares vest, you own nothing; you just have a future claim.

RSUs are different from stock options. With options you have to buy shares at a set strike price, and they can end up worthless if the stock drops. RSUs are simpler: when they vest, real shares show up in your brokerage account at no purchase cost. As long as the stock is worth anything at all, vested RSUs have value.

Why they're taxed as income at vesting

Because you receive shares for free as compensation for your work, the tax system views that value as wages. On the day a batch vests, the IRS takes the number of shares times the market price and adds that figure to your taxable income for the year. That amount is taxed at your ordinary income tax rate — the same brackets that apply to your salary — and it's also subject to Social Security and Medicare taxes.

The key takeaway: you owe tax at vesting even if you never sell a single share. The shares themselves are now yours, but a tax bill has been triggered the instant they landed.

Sell-to-cover and withholding

To handle that tax bill, most employers use sell-to-cover: when your RSUs vest, the plan automatically sells a portion of the shares and sends the proceeds to the IRS as withholding. You keep the remaining shares.

One thing to watch: the default withholding rate for supplemental income is often a flat percentage that may be lower than your actual marginal tax rate. If you're a high earner, the amount withheld at vesting can fall short of what you ultimately owe — leaving a surprise balance at tax time. It's worth checking the current supplemental withholding rate and comparing it to your own bracket, and setting aside extra if there's a gap.

• Shares vest at the market price on the vest date.
• Some shares are sold automatically to cover estimated taxes.
• You keep the rest as ordinary shares you can hold or sell.

Capital gains if you hold and sell later

Once shares vest, the vest-date price becomes your cost basis — and that part has already been taxed as income. Any change in value after vesting is a separate event, taxed as a capital gain or loss only when you sell.

• Sell at vesting (or close to it): little or no extra gain, since the price hasn't moved much from your basis.
• Hold and sell later for more: the increase is a capital gain. Hold longer than a year and it's typically taxed at lower long-term rates; sell sooner and it's taxed as short-term, at ordinary rates.
• Hold and the stock falls: you may have a capital loss — but remember you already paid income tax on the higher vest-date value.

The concentration-risk trap

This is where smart, well-paid people quietly get hurt. Because RSUs keep vesting, it's easy to wake up with a huge slice of your net worth tied to a single company — the same company that also pays your salary. If that stock stumbles, you can lose your savings and your income at the same time.

When your employer's stock is both your paycheck and your portfolio, a bad quarter hits you twice.

A common rule of thumb is to decide how much of your net worth you're comfortable holding in any one stock, and trim back to that line as new shares vest. Since vested RSUs were already taxed as income, selling right away often triggers little or no additional tax — making it a low-cost moment to diversify. The proceeds can go toward index funds, an emergency fund, or long-term goals you might model with our compound interest calculator or FIRE calculator.

A worked example

Suppose 100 shares vest when the stock is $50, so $5,000 is added to your income.

The after-tax cash you walk away with is well below the $5,000 sticker value, because income tax and payroll taxes came out first. That gap surprises people every year — and it's exactly what our RSU calculator is built to estimate, so you can see your real take-home before the shares hit.

This is general information to help you understand how RSUs work — not tax or investment advice. Rates, withholding rules, and thresholds change, so confirm the current figures and see our disclaimer before making decisions.

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