RSU & Restricted Stock: Vesting Income, Withholding & Capital Gain

RSU Vesting = Ordinary Income • 22% Supplemental Withholding • Basis = FMV at Vesting • §83(b) for Restricted Stock
IRC §83IRC §3402(g)Treas. Reg. §1.83-1
← Individual Tax

Restricted stock units (RSUs) are the most common form of equity compensation for employees at public and late-stage private companies. When RSUs vest, the employee recognizes ordinary income equal to the fair market value of the shares on the vesting date - regardless of whether the employee sells the shares. That income is subject to federal and state income tax and FICA, with supplemental wage withholding applied by the employer. What the employee does after vesting - hold or sell - determines whether they have capital gain or loss, and the tax rate depends on how long they hold the vested shares. The critical distinction: RSUs are not options, and the §83(b) election that benefits restricted stock holders does not apply to RSUs.

RSU Tax Timeline

At grant: No tax event. The grant is just a promise of future shares. No income recognized, no Form W-2 impact.

At vesting: Ordinary income equal to FMV of shares on vesting date. Included in W-2 Box 1 wages. Employer withholds at supplemental rate (22% federal for amounts under $1 million; 37% for amounts exceeding $1 million in the year). FICA also applies. The employee's cost basis in the shares equals the income recognized.

After vesting - sale: Capital gain or loss equal to sale price minus FMV at vesting (the basis). Short-term if sold within one year of vesting; long-term if held more than one year after vesting. The holding period begins on the vesting date, not the grant date.

Withholding: The Tax Shortfall Problem

The 22% supplemental federal withholding rate applies to RSU vesting income up to $1 million. For employees in the 32%, 35%, or 37% tax brackets, this creates a guaranteed withholding shortfall - the employer withholds 22% but the employee actually owes 32-37%. The employee must make up the difference through quarterly estimated tax payments or face an underpayment penalty. Many high-earning employees are surprised by large tax bills in April because their RSU vesting triggered income that was under-withheld throughout the year.

The sell-to-cover method of withholding only addresses the 22% mandatory withholding rate, not the full tax owed. When an employer uses sell-to-cover (selling a portion of vested shares to cover withholding), the shares sold represent approximately 22% of the grant. For an employee in the 35% bracket, this leaves a 13% gap that must be covered through estimated payments. Employees can request supplemental withholding at a higher rate from their employer, but few do.

Restricted Stock vs. RSUs: The §83(b) Distinction

Restricted stock is different from RSUs. Restricted stock is actual stock delivered at grant subject to forfeiture conditions. RSUs are a promise to deliver stock in the future upon satisfaction of vesting conditions. The §83(b) election - which allows a recipient to recognize income at grant (usually at a low value) rather than at vesting (usually at a higher value) - is available for restricted stock but NOT for RSUs. This is because RSUs are not "property" under §83 until they vest; they are merely contractual rights to receive property in the future. Employees who receive restricted stock should carefully evaluate the §83(b) election within 30 days of receiving the grant.

Multi-State Allocation for Mobile Employees

RSU income earned over a multi-year vesting period must be allocated among the states where the employee worked during that period. If an employee receives an RSU grant while living in New York, moves to Texas during the vesting period, and the RSUs vest after the move, the income is allocated between New York and Texas based on the number of vesting period days worked in each state. New York will assert its right to tax the New York portion of the RSU income even if the employee is no longer a New York resident at vesting. This multi-state allocation creates complex filing requirements for mobile tech employees and executives.

Related Tools & Articles
Stock Options GuideISO vs. NSO - compare to RSU tax treatment §83(b) ElectionAvailable for restricted stock but NOT RSUs ESPP GuideEmployee stock purchase plans - another equity comp vehicle Capital Gains CalculatorSale of vested RSU shares - short vs. long-term treatment Multi-State TaxRSU income allocation for employees who moved between states Individual Tax HubAll compensation and income topics
Authority: IRC §83(a) (property transferred in connection with performance of services - included in gross income in first taxable year in which rights are transferable or not subject to substantial risk of forfeiture; RSUs vest when forfeiture risk lapses); IRC §83(b) (election to include income at transfer - 30-day election; available for restricted stock not RSUs; RSUs not "property" under §83 until vested); IRC §83(e)(3) (§83 does not apply to unfunded deferred compensation plans - RSUs treated as nonqualified deferred compensation if no actual stock is transferred at grant; most RSUs technically unfunded promises); IRC §3402(g) (supplemental wage withholding - 22% flat rate on supplemental wages up to $1 million aggregate; 37% on amounts exceeding $1 million in the year; applies to RSU vesting income); IRC §3121(a) (FICA wages - RSU vesting income included in FICA wages; Social Security wage base $184,500 for 2026; Medicare unlimited; additional 0.9% Medicare tax above $200,000/$250,000); Treas. Reg. §1.83-1 (property subject to §83 - includes stock received subject to forfeiture conditions; does not include RSUs prior to delivery of stock); Rev. Rul. 2005-48 (tax treatment of RSUs - income recognized at vesting when stock delivered; no §83(b) election available; basis equals FMV at delivery).