At Vesting
The fair market value of vested RSUs is treated as ordinary income and appears on the W-2. Employers generally withhold federal and state taxes. Yet, the amount withheld may not fully cover the tax liability for high earners.
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Section 01
How RSUs Are Taxed
Taxation on RSUs happens at two different stages as outlined below:
At Sale: If RSUs are sold at a higher price than their vesting value, the difference is taxed as a capital gain depending on the holding period.
- Short-term capital gains (if sold within one year) are taxed at ordinary income tax rates.
Long-term capital gains (if held for more than a year) receive preferential tax treatment.
Section 02
Why RSUs Appear to Be Taxed Twice
The belief that RSUs are subject to double taxation arises from the misunderstanding of tax reporting. Employees see taxes withheld at vesting and later face capital gains tax upon selling. So it seems as though taxes are paid twice on the same income. However, taxes are applied to different portions in reality:
- The vesting stage triggers income tax.
- The sale stage applies capital gains tax on the appreciation after vesting.
Section 03
Final Considerations
RSUs are an excellent compensation tool. However, it should be noted that misunderstanding the tax structure can result in unnecessary concerns about double taxation. Smart taxation planning and establishing healthy cost basis reporting can present assistance to employees in managing RSU-related taxes. If you are not sure about tax implications, Dimov NYC CPA presents professional expertise in RSU taxation.
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