RSUs Explained: How Restricted Stock Units Vest, Get Taxed, and What to Do When They Land

If you work at a public tech company, a large corporation, or a pre-IPO startup that has already gone public, there is a good chance part of your compensation shows up as Restricted Stock Units rather than cash. RSUs are now the dominant form of equity compensation at large employers, replacing the stock-option-heavy packages that were standard in the 1990s and 2000s.

They are also one of the most misunderstood pieces of a compensation package. Employees regularly get surprised by the tax bill, forget that vesting is not the same as ownership, hold too much concentrated stock for too long, or sell too early out of tax confusion that doesn't actually apply. None of that is complicated once you understand the mechanics - it is just rarely explained clearly.

This guide covers what RSUs actually are, exactly how and when they get taxed, the difference between sell-to-cover and net settlement, how RSUs compare to stock options, and a framework for deciding how much to hold once they vest.

What Is a Restricted Stock Unit?

A Restricted Stock Unit is a company's promise to deliver a specific number of shares to you on a future date, contingent on a vesting condition - almost always continued employment through that date, sometimes combined with a performance milestone.

Two things make RSUs different from actual stock ownership and from stock options:

You don't own anything until vesting. An RSU grant is a promise, not a share. You cannot vote it, sell it, or collect dividends on it (though many companies pay "dividend equivalents" that vest alongside the units). If you leave the company before a tranche vests, that unvested portion is simply forfeited.

You don't pay anything to receive the shares. Unlike a stock option, which requires you to pay a strike price to convert it into a real share, an RSU converts into a real share automatically at vesting, at no cost to you. This is why RSUs are sometimes called "full-value" awards - a vested RSU is worth exactly what the stock is worth, not the difference between the stock price and some strike price.

How RSU Vesting Works

Vesting is the schedule that converts your promised units into actual, owned shares over time. The two building blocks:

Cliff vesting - nothing vests until a minimum period has passed, then a chunk vests all at once. Most US tech companies use a one-year cliff: if you leave before your first anniversary, you forfeit 100% of your unvested grant.

Graded vesting - after the cliff, the remaining units vest incrementally, usually monthly or quarterly, rather than all at once.

The most common structure combines both: a four-year grant with a one-year cliff, then the remainder vesting quarterly or monthly over the following three years.

Exact schedules vary by company - some vest evenly every month with no cliff, some front-load more in year one, and refresh grants (additional RSUs granted in later years on top of the original grant, common at most large tech employers) layer their own new four-year schedules on top of what's already vesting. Always check your own equity plan document rather than assuming the standard schedule applies.

How RSUs Are Taxed

This is where most of the confusion lives, so it's worth being precise.

At vesting, RSUs are taxed as ordinary income. The fair market value of the shares on the vesting date - not the grant date - is added to your W-2 as wage income, exactly like a cash bonus. It is subject to federal income tax, state income tax where applicable, Social Security, and Medicare, at your marginal rate for that income level. There is no way to defer this tax or elect capital gains treatment on it; the IRS treats the shares as compensation the moment you have unrestricted ownership of them.

After vesting, the shares are a normal investment. Your cost basis is reset to the fair market value on the vesting date - the same number that was taxed as income. From that point forward, any additional price movement is a capital gain or loss:

• Sell within 12 months of vesting: short-term capital gain, taxed at your ordinary income rate
• Sell more than 12 months after vesting: long-term capital gain, taxed at the lower long-term rate (0%, 15%, or 20% depending on income)

Worked example. You're granted RSUs that vest 500 shares when the stock is trading at $120.

• Taxable income at vest: 500 x $120 = $60,000, added to your W-2 and taxed as ordinary income in that tax year
• Your cost basis in those 500 shares is now $120/share
• If you sell immediately at $120, there is no additional gain or loss to report
• If you hold and sell a year later at $150, you owe long-term capital gains tax on 500 x ($150 - $120) = $15,000 of gain - the original $60,000 is not taxed again

The "Double Taxation" Myth

A frequent - and incorrect - complaint is that RSUs get taxed twice. They don't. The vest-date value is taxed once, as income. Only the appreciation after vesting is taxed a second time, as a capital gain, and only if the stock actually goes up and you sell. This misconception usually traces back to a brokerage's 1099-B, which sometimes reports the full gross sale proceeds without correctly reflecting that your cost basis already equals the vest-date value - making it look like the same dollars are being counted twice when they aren't. Double-check your cost basis against your vest confirmations before filing; this is the single most common RSU tax-filing error.

Paying the Tax: Sell-to-Cover vs. Net Settlement vs. Cash

Because RSU income tax is due the moment shares vest - not when you eventually sell - your employer is required to withhold taxes at vesting, the same way it withholds from a paycheck. There are three mechanisms companies use:

Most public companies use sell-to-cover or net settlement, and pick one method company-wide rather than letting employees choose. Economically the two are nearly identical - you end up with the same number of net shares either way. The practical difference is paperwork: sell-to-cover generates a same-day sale on your 1099-B (usually at a negligible gain or loss versus your cost basis, since the sale happens seconds after vesting), while net settlement does not.

RSUs vs. Stock Options: NSO and ISO Compared

RSUs are the lower-risk, lower-complexity award: they're always worth something once vested, and the tax treatment is simple and predictable. Options are higher-risk but higher-leverage: an option struck at $20 on a stock that reaches $60 has tripled in value from the stock's perspective, but the option's value has gone up far more than 3x because you only put up $20 of "cost." That same option is worth exactly zero if the stock stays below $20.

A note on restricted stock and the 83(b) election. Restricted stock (actual shares granted upfront, subject to forfeiture) is a different instrument from restricted stock units (a promise to grant shares later). Only restricted stock - not RSUs - is eligible for an 83(b) election, which lets you pay income tax on the grant-date value upfront instead of at each vesting date. If a recruiter or offer letter mentions an 83(b) election alongside an "RSU" grant, confirm which instrument you're actually receiving; the terms get used loosely and the tax treatment is materially different.

Evaluating RSUs in a Job Offer

When comparing offers, RSU grants are usually quoted as a total dollar value over four years (e.g., "$400,000 in RSUs, vesting over 4 years"). A few things to check before treating that as $100,000 of annual comp:

1. Is the vesting schedule front-loaded or even? A grant with a heavier first-year cliff delivers more value sooner than one that vests evenly, which matters if you might not stay the full four years.
2. Are refresh grants typical at this company? Many employers issue additional RSU grants annually on top of the initial award, meaning your real run-rate by year three or four is higher than the initial grant alone suggests. Ask directly rather than assuming.
3. What's the share count, not just the dollar value? The dollar figure in an offer letter is calculated using the stock price on the day the offer was made. If the stock has moved meaningfully by the time you actually start (and grants are often priced closer to your start date, not the offer date), the real value can differ substantially from the number quoted verbally.
4. What happens to unvested RSUs if you're let go, or if the company is acquired? Some offer letters include vesting acceleration clauses (often only in an acquisition scenario) - worth understanding before you need them.

The Concentration Risk Nobody Warns You About

Because RSUs are denominated in company stock rather than cash, employees who hold their vested shares - rather than selling and diversifying - can end up with an uncomfortable amount of their net worth tied to a single company's stock. That company is also the same one paying their salary, which means a downturn at the employer can hit your job and your portfolio at the same time.

This isn't a hypothetical. Stock-based compensation now makes up a meaningful share of total compensation at the largest tech employers, which is exactly why RSU-heavy paychecks accumulate into concentrated positions if left unmanaged:

Source: FMP cash flow and income statement data, most recent fiscal year on file for each company as of September 2026.

A common, simple framework:

• Default to selling at vest. You already paid the tax whether you sell or not, so there's no tax reason to hold. Selling immediately (or close to it) locks in the value and moves you into a diversified position.
• Hold only with a specific reason - genuine conviction in the company beyond "it's my employer," a desire to manage which tax year a future gain lands in, or because the position is already a small fraction of your total net worth.
• Set a target concentration limit. A common rule of thumb among financial advisors is capping any single stock - including employer stock - at 10% to 15% of total investable net worth, and systematically selling down vested shares that push you above that line.

Monitoring Your Position After Vesting

Whether you sell immediately, hold a portion, or hold the full grant, the mechanical part of the job isn't over once shares land in your account - you still need to know when your employer's stock crosses a price level that matters to you, whether that's a target sale price, a level where concentration risk gets uncomfortable, or simply a big move around an earnings report.

A price alert on your employer's ticker does the watching for you - useful both while you're deciding whether to sell a vest and afterward, if you choose to hold a portion long-term.

Frequently Asked Questions

What is a Restricted Stock Unit (RSU)?

An RSU is a company's promise to give you a set number of shares once you satisfy a vesting requirement, usually staying employed for a certain amount of time. Unlike a stock option, an RSU does not require you to pay anything to receive the shares - it has real value the moment it vests, even if the stock price has gone nowhere. The tradeoff is that RSUs are worth nothing if you leave before they vest, and you owe income tax on the full value the day they do.

How are RSUs taxed?

RSUs are taxed as ordinary income at vesting, not when they are granted and not when you eventually sell. The IRS treats the fair market value of the shares on the vesting date as W-2 wage income, subject to federal and state income tax plus Social Security and Medicare withholding, exactly like a cash bonus. After vesting, the shares become a normal investment: if you hold them and the price rises or falls before you sell, that difference is a separate capital gain or loss, taxed under capital gains rules, not income tax rules.

Is there double taxation on RSUs?

No, this is one of the most common RSU misconceptions. The value at vest is taxed once, as ordinary income. Only the appreciation (or loss) that happens after vesting is taxed a second time, and only as a capital gain or loss on the sale - it is not the same dollars being taxed twice. The confusion usually comes from a brokerage 1099-B that reports the full sale proceeds without correctly adjusting the cost basis to the vest-date value, which can make it look like the vest-date value is being taxed again as a gain when it isn't.

What is sell-to-cover and how is it different from net settlement?

Both are ways to pay the mandatory withholding tax due at vesting, and most companies pick one method for the whole plan rather than letting employees choose per-grant. Sell-to-cover: all the shares vest and land in your account, then your broker immediately sells a portion of them on your behalf to cover the withholding, leaving you with the remaining net shares. Net settlement: the company withholds and cancels enough of the not-yet-issued shares to cover the tax itself, so you only ever receive the already-net share count and no sale transaction appears on your 1099-B. Economically the two produce nearly the same after-tax outcome; the difference is mechanical, not financial.

Should you sell RSUs immediately when they vest, or hold them?

Most financial advisors default to selling vested RSUs promptly and reinvesting the proceeds, because holding concentrates both your paycheck and your investment portfolio in the same single company - if the employer has a bad year, you can lose your job and a chunk of your net worth at the same time. The main reasons to hold instead are strong personal conviction in the company's prospects, a desire to defer additional capital gains into a later tax year, or an already well-diversified portfolio where the position is a small percentage of total net worth. There is no tax penalty for selling immediately after vesting - you already owe the income tax regardless of whether you sell, and selling right at vest means little or no additional capital gain or loss to report.

How is an RSU different from a stock option (NSO or ISO)?

An RSU is always worth something once vested, because you receive the shares outright with no purchase required - a share worth a few cents still has value. A stock option only has value if the stock price is above your strike price at exercise; an option with a strike price above the current stock price is worthless. Non-qualified stock options (NSOs) are taxed as ordinary income on the spread between strike price and fair market value at exercise. Incentive stock options (ISOs) can qualify for long-term capital gains treatment on the full gain if holding requirements are met, but can also trigger the Alternative Minimum Tax (AMT) at exercise. RSUs are simpler and lower-risk; options carry more tax complexity but more upside leverage if the stock rises well above the strike.

Related Reading

• Stock Buybacks Explained - the other side of share count math, and how buybacks offset RSU-driven dilution
• Capital Gains Tax for Investors - short-term vs. long-term treatment once your vested shares become a normal investment
• How to Build a Stock Watchlist - track your employer's stock alongside the rest of your portfolio
• Portfolio Concentration vs. Diversification - the risk framework behind the "don't hold too much employer stock" rule
• How to Set Stock Price Alerts - the mechanics of setting the kind of target-price alert covered above