How Are RSUs Taxed? Vesting, Capital Gains, and Tax Planning
How Are RSUs Taxed?
If you understand what RSUs are and how the grant-vest-sale lifecycle works, the next question is the one that actually costs money if you get it wrong: how are they taxed?
The short answer: RSUs are taxed twice. Once as ordinary income when they vest, and again as a capital gain (or loss) when you sell the shares. The first event is automatic. The second is in your control. The planning opportunity lives in the gap between the two.
The First Tax Event: Vesting
When your RSUs vest, the fair market value of the shares on the vest date is treated as ordinary income. It’s added to your W-2 alongside your salary, bonus, and any other compensation. There’s no special rate. It’s taxed at your marginal income tax rate, the same rate that applies to the last dollar of your earned income.
For 2026, federal income tax brackets for high earners range from 32% to 37%, depending on filing status and total taxable income. These rates are subject to change. If you’re receiving meaningful RSU grants, you’re likely in one of those brackets — which is exactly where the withholding math starts to diverge from reality.
Your employer withholds taxes on RSU income at the federal supplemental wage rate. For 2026, that rate is 22% on supplemental wages up to $1 million, and 37% on supplemental wages exceeding $1 million. These rates are subject to change. State taxes are withheld separately based on your state’s rules.
The withholding rate is not your tax rate. It’s a deposit toward your tax liability. If the deposit doesn’t match what you actually owe, the difference comes due when you file.
The Withholding Gap
This is the insight most executives miss until April.
Consider a hypothetical scenario: a professional earning $400,000 in base salary plus $200,000 in RSUs vesting in a single year. Total W-2 income: $600,000. For a single filer in 2026, that puts a significant portion of income in the 35% federal bracket.
The employer withholds at 22% on the RSU income (assuming total supplemental wages are under $1 million): $44,000.
The actual federal liability on that $200,000, given the marginal rate: closer to $66,000–$70,000, depending on deductions and other income factors.
That’s a gap of approximately $22,000–$26,000 in federal taxes alone — before state taxes. If you’re in a high-tax state, the total shortfall grows.
This isn’t an error. It’s how supplemental wage withholding works by design. The problem is that many executives don’t see the gap until tax filing, and by then, the cash to cover it has to come from somewhere — savings, portfolio liquidation, or a payment plan.
The fix is straightforward: map your vesting schedule at the beginning of each year, estimate your total taxable income including all RSU tranches, and make quarterly estimated tax payments to close the gap before it becomes a surprise. A thorough tax plan may account for this before the first share vests, not after the last one has.
We walked through this withholding gap and how to plan for it in more detail on Off the Wall. Watch the episode.
The Second Tax Event: Selling
Once your RSUs have vested and you own the shares, the tax clock resets. Your cost basis is the fair market value on the vest date — the same amount that was taxed as ordinary income. From that point forward, any appreciation is a capital gain. Any decline is a capital loss.
The rate depends on how long you hold after vest:
Short-term capital gains (held one year or less after vest): Taxed at your ordinary income tax rate. For 2026, that means up to 37% federal for high earners. There is no preferential rate. This is identical to how your salary is taxed.
Long-term capital gains (held more than one year after vest): For 2026, the maximum federal long-term capital gains rate is 20% for taxable income above the applicable threshold, plus a potential 3.8% net investment income tax (NIIT) for high earners, bringing the effective ceiling to 23.8%. These thresholds are subject to change.
The differential between short-term and long-term rates is significant. On a hypothetical $50,000 gain, the difference between a 37% rate and a 23.8% rate is $6,600. Whether that difference justifies holding through the additional risk of a concentrated position is a decision that depends on your full financial picture — not just the tax math.
Capital Losses and Wash Sale Rules
If you sell RSU shares below your cost basis (the fair market value at vest), the loss is deductible. Capital losses offset capital gains dollar for dollar, and for 2026, up to $3,000 in net losses can offset ordinary income per year (subject to change). Remaining losses carry forward.
One critical rule: wash sales. If you sell shares at a loss and buy substantially identical securities within 30 days before or after the sale, the IRS disallows the loss. This matters for RSU holders who also participate in an employee stock purchase plan (ESPP) or who receive new RSU vests while selling older positions. A sale at a loss in March followed by an ESPP purchase of the same stock in April can trigger a wash sale and wipe out the tax benefit of the loss.
Planning around wash sale windows is part of building a functional sell strategy. It’s a mechanical problem, solvable with a calendar and awareness, but it trips up executives who manage their RSUs and ESPP participation separately.
Tax Planning Strategies to Consider
Several approaches may reduce the long-term tax impact of RSU compensation. These are educational in nature. Individual applicability depends on your specific tax situation and should be discussed with your CPA and advisor.
Mapping the vesting schedule annually. Knowing what’s vesting, when, and at what estimated value makes total income projectable and can help reduce the April surprise.
Making quarterly estimated payments. If withholding is likely to fall short (and for high earners with RSU income, it often does), quarterly payments close the gap incrementally rather than in a single lump.
Evaluating the sell-at-vest approach. Selling at vest converts the RSU into cash or diversified investments immediately. The capital gain is zero (basis equals fair market value at vest), so the only tax is the ordinary income already withheld. This simplifies the tax picture and reduces concentration risk. Investors may consider this as a default approach, with exceptions for specific situations.
Coordinating with other stock-based compensation. If you have stock options, ESPP shares, and RSUs, the tax strategy may need to account for all three. Exercising ISOs in the same year RSUs vest, for example, can trigger AMT implications that change the optimal sequence.
Considering tax-loss harvesting in the broader portfolio. If you’re holding RSU shares and plan to sell at a gain, harvesting losses elsewhere in your portfolio can offset the gain. Direct indexing strategies can generate incremental losses throughout the year that serve this purpose — though wash sale rules require coordination across all accounts.
When RSU Tax Planning Gets Complex
RSU taxation is straightforward in isolation. It gets complex when layered with other compensation, other income sources, and other planning goals.
A career transition adds a wrinkle: unvested RSUs are typically forfeited, and the remaining vested shares need a sell strategy that accounts for your new income level. A year between roles — with lower total income — may create an opportunity to sell RSU shares at a more favorable capital gains rate.
A major liquidity event (business sale, inheritance, property sale) in the same year as a large RSU vest compresses taxable income and can push you into higher brackets or phase out deductions. Timing the sale of RSU shares around these events is where the planning creates real value.
This is why RSU tax planning isn’t a once-a-year exercise. It’s a rolling conversation tied to your income, your vesting schedule, and whatever else is happening in your financial life that year.
What to Do Next
If you’re receiving RSUs, the tax dimension isn’t optional. It runs every year, on a schedule you can predict, and the cost of not planning for it is measurable.
The starting questions: What’s vesting this year and next? What’s my estimated total income? Is my withholding going to cover it? And if I sell, when is the right time given everything else happening in my financial picture?
A fee-only fiduciary who understands equity compensation and tax planning can integrate both sides of the RSU equation — the investment decision and the tax decision — into a strategy that works across years, not just in one filing season. Prefer to listen? We covered what to do when RSUs vest on Between Sips. Stream on Apple Music or Spotify.
If your RSU tax strategy could use a second look, that’s a conversation worth having. Let’s talk.
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