What are RSUs, and how are they taxed?

A restricted stock unit is a promise to deliver shares once vesting conditions are met, typically a schedule over several years and sometimes with a one-year cliff. Unlike stock options, RSUs have value as long as the stock has any value, since you are receiving shares rather than the right to buy them. At vesting, the full market value of the shares is treated as ordinary compensation income, reported on your W-2, and taxed at your ordinary rate. From that moment you own shares with a cost basis equal to that value, and any subsequent gain or loss is a capital gain or loss when you sell.

The tax mechanics generate a recurring and avoidable problem. Most employers withhold on vesting at the supplemental wage rate, which is 22 percent federally for amounts under a threshold. For anyone whose marginal rate exceeds that, and RSU recipients frequently are, the withholding is insufficient and the shortfall appears as a tax bill in April. The fix is either increasing withholding elsewhere, making estimated payments, or setting aside the difference at each vest. Some employers permit electing a higher withholding rate, which is worth asking about.

Two decisions follow every vest. First, whether to hold or sell. Because you were taxed at full value, holding is economically identical to receiving a cash bonus and immediately buying your employer's stock with it, which most people would not do deliberately. That framing usually argues for selling at vest and diversifying, particularly given that your salary already depends on the same company. Second, be aware of the basis reporting trap: brokers frequently report a cost basis of zero on RSU sales because the compensation portion was reported on your W-2, and filing without correcting it means paying tax twice on the same money. Check the supplemental statement your broker provides and adjust the basis on Form 8949.