RSUs (Restricted Stock) Taxes Made Simple: How Vesting Works, When You Owe Tax, and Whether to Sell or Hold

Restricted stock is a valuable part of compensation, but it can be confusing if you aren’t familiar with the rules. Most professionals receive restricted stock units (RSUs)—a promise of shares that become yours as they vest. Fewer receive restricted stock awards (RSAs), which are actual shares you hold from day one but can forfeit if you leave before they vest. Because RSUs are most common, we’ll focus there and then note where RSAs differ.

With RSUs, the key moment is vesting. On each vest date, your company takes the stock’s fair market value and adds it to your W-2 as ordinary income. That tax is due whether you sell the shares or keep them. Employers typically cover part of the bill by withholding cash or a portion of the shares, but the default “supplemental” withholding rate is often lower than a high earner’s true marginal rate. If you’re in that camp, plan on topping up with estimated payments to avoid penalties. Once your RSUs vest, your cost basis becomes the stock price on that day, and your holding period starts then. Any price movement after vesting is capital gain or loss when you eventually sell; hold longer than a year for potential long-term capital gains treatment. Importantly, once your shares vest the decision to hold the shares becomes an investment decision. 

Because tax is triggered at vest, many people adopt a simple, effective policy: sell at vest and diversify. You’ve already paid (or owe) the ordinary income tax; holding simply layers on single-stock risk. Selling promptly produces clean tax lots, reduces concentration, and puts cash to work in your target portfolio. If you prefer to hold some shares, make it an intentional investment decision: set a written position limit (for example, cap any single employer stock at 5–10% of liquid net worth) and decide in advance when you’ll trim—by date, by price, or by percentage.

A smooth process starts before the vest date. Confirm whether you have RSUs or RSAs, know your vesting schedule and blackout windows, and consider a 10b5-1 plan so sales can execute automatically even when you’re restricted. On vest day, record the share count and vest price for basis tracking and verify how taxes were withheld (net share settlement, sell-to-cover, or cash). After vesting, decide whether you’ll sell now or hold under your pre-set rules, then rebalance the rest of your portfolio. It’s best practice to keep every grant notice and vest confirmation in case there is any discrepancies with reported 1099’s. 

Here’s a quick illustration. Suppose 1,000 RSUs vest at $50. You recognize $50,000 of W-2 income that day. If the company withholds roughly $18,000 in taxes by selling or retaining shares, you’ll receive the remainder in shares or cash. If you sell right away around $50, there’s little to no capital gain or loss and you’ve reduced concentration. If you hold and the price later drops to $45, your already-owed income tax doesn’t change—you’ve simply taken market risk and would realize a capital loss if you sell at that lower price.

RSAs follow similar principles with one key twist: the 83(b) election. Within 30 days of an RSA grant, you can elect to recognize the shares’ current value as ordinary income immediately, shifting future appreciation into capital gains and starting the holding period sooner. This can be attractive when the grant’s value is low and you expect growth, but it carries meaningful risk—if you forfeit the shares or the price falls, you don’t get a tax refund. RSUs are not eligible for 83(b).

A few pitfalls are worth avoiding. Don’t assume employer withholding fully covers your taxes; confirm your marginal rate and schedule estimates if needed. Don’t let blackout windows trap you into unintended exposure—use a 10b5-1 plan. And don’t rely solely on the broker for basis reporting—keep meticulous records so your return reflects the correct numbers. Finally, consider charitable gifting or donor-advised funds for highly appreciated shares you plan to trim anyway.

Bottom line: know your vesting schedule, understand that your shares are taxed when they vest, and decide in advance whether you’ll sell or hold. For many, “sell at vest and diversify” is the most reliable path—simple, disciplined, and aligned with a long-term plan.

This article is for education, not tax advice. Coordinate with a CPA or advisor for your specific situation.

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