Step 1 — Vesting is W-2 income
FMV at vesting lands on your W-2 as ordinary income. Federal, state, and FICA all apply immediately.
How the double tax happens
Step 2 — Wrong basis at sale
Brokerages often report a $0 cost basis for RSUs sold. If you accept that, you pay tax twice on the vesting-day value.
The fix — adjust cost basis
Cost basis at sale = FMV at vesting (the W-2 income). Adjust it in your tax software or on Form 8949.
Why RSUs are tricky
A powerful comp tool with a specific tax trap
Restricted Stock Units (RSUs) are a popular form of stock-based compensation offered by companies to their employees. While RSUs can be a valuable asset, they come with specific tax implications that, if not managed carefully, can result in double taxation.
Unlike stock options, which give you the right to purchase company stock at a set price, RSUs are actual shares of stock given to you once certain conditions are met, such as staying with the company for a specific amount of time or meeting performance targets.
However, the taxation of RSUs can be complex. Unlike regular income or stock options, RSUs are taxed in a way that can result in you paying taxes on the stock both when it vests and when you eventually sell it. This can lead to double taxation if you’re not careful.
01At vesting
How RSUs are taxed
RSUs are taxed when they vest, not when they are granted.
W-2 income
The FMV of the RSUs at vesting is considered regular income and is taxed as such. Subject to federal and state income tax, plus Social Security and Medicare (FICA) taxes.
Withholding
Your employer is required to withhold taxes on the value of the vested RSUs, similar to how they withhold taxes from your regular paycheck.
This is where double taxation can come into play. While you pay taxes on the RSUs when they vest, you may also owe taxes when you sell the shares — which could result in being taxed on the same income twice if you don’t track your cost basis correctly.
02RSU income
What is RSU income?
RSU income is the value of the shares you receive when the RSUs vest. Calculated by multiplying the number of vested shares by the FMV of the stock at the time of vesting.
Example
100 RSUs vest when the stock is worth $50 per share → RSU income = $5,000 ($50 × 100 shares). This amount is added to your paycheck as compensation and taxed accordingly.
One thing to note: adding RSU income increases your taxable income, potentially moving you into a higher tax bracket for the year.
03After vesting
RSU short-term vs. long-term taxation
After your RSUs vest, you can sell them or hold onto them. Tax depends on how long you hold.
< 1 year
Short-term capital gains
Any profit is taxed as short-term capital gains, at your ordinary income tax rate — can be higher depending on your income bracket.
> 1 year
Long-term capital gains
Profit taxed at the lower long-term capital gains rate — 0%, 15%, or 20%.
If you sell RSUs within one year of vesting and the stock has appreciated by $10 per share, that $10 will be taxed at the ordinary income tax rate. If you hold the shares for over a year and the same $10 gain is realized, it will be taxed at the lower long-term capital gains rate.
04Avoid the trap
How to avoid double taxation on RSUs
The primary risk with RSUs is double taxation — paying taxes when they vest and again when you sell. Two common mistakes cause it; four strategies prevent it.
Common mistake 1
Selling RSUs without adjusting cost basis
If you sell without adjusting for taxes you already paid at vesting, you could end up paying taxes on the same income twice. Adjust the cost basis when you report the sale.
Common mistake 2
Misreporting RSU income
Failing to properly report the RSU income at vesting leads to either under-report or over-report — underpayment or overpayment of taxes.
Verify cost basis
Make sure the cost basis of your RSUs reflects the W-2 income reported on your tax return.
Adjust in tax software
Use TurboTax, TaxAct, or similar to manually adjust cost basis. Many tools let you input the vesting-day FMV.
Hold for long-term
If possible, hold your RSUs for more than one year to qualify for the long-term capital gains rate.
Tax-advantaged accounts
Roth IRA or 401(k) — helpful for diversifying away from concentrated employer stock while lowering the overall burden.
05Calculation
How to calculate RSU income
Four steps to determine your RSU taxable income.
Step 01
Find vested shares
Check how many RSUs have vested during the year.
Step 02
Determine FMV × shares
Multiply the number of vested shares by the FMV at the time of vesting.
Step 03
Subtract withholding
Your employer will have withheld taxes on the vested RSUs — subtract this from the total value.
Step 04
Compute sale liability
When you sell, calculate capital gains or losses based on sale price compared to adjusted cost basis.
Example: 100 RSUs vest when the stock is worth $50 per share. RSU income is $5,000. Employer withholds $1,500, so the net RSU income is $3,500. When you sell later, you’ll pay taxes on gains or losses based on sale price vs. the adjusted cost basis.
06Planning
RSU tax planning strategies
Charitable donations
Donate RSU shares directly to charity to offset taxable income.
Tax-loss harvesting
If you have other investments with capital losses, sell them to offset gains from your RSUs.
Timing sales
Plan the timing of RSU sales to minimize impact on your tax bracket. Selling in a lower-income year could reduce your overall tax liability.
Get the cost basis right and skip the double tax
If you’re unsure how to handle RSU taxation, it’s always a good idea to consult with a tax professional to optimize your tax strategy. Call (212) 641-0673 or send the contact form.
07FAQ
RSU tax FAQs
How are RSUs taxed?
RSUs are taxed as W-2 income when they vest. They are also subject to federal, state, and FICA taxes.
What is RSU income?
RSU income is the fair market value (FMV) of the shares at the time they vest. This income is added to your paycheck and taxed as regular income.
RSU short-term vs. long-term taxation?
Short-term capital gains apply if you sell RSUs within one year of vesting, while long-term capital gains apply if you hold the shares for more than one year.
How do I calculate RSU income?
Multiply the number of vested shares by the FMV at vesting to calculate your RSU income, then subtract any taxes withheld.
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Cost-basis adjustment done right, every year
By understanding how RSUs are taxed, being mindful of cost basis adjustments, and utilizing tax strategies like holding shares for over a year, you can avoid paying taxes twice on your RSU earnings. Call (212) 641-0673 or send the contact form. No charge for the conversation.
Reviewed by George Dimov, CPA, New York, NY. Serving clients in all 50 states, 15+ years advising employees on equity compensation and stock-based tax planning. President of George Dimov, CPA, a New York City firm serving clients across the five boroughs and nationwide.