October 2, 2026 · 7 min read
How Are RSUs Taxed? Definition, How It Works and Examples
When stock units from your employer become taxable, how much is held back from your pay, why that often falls short and what happens when you sell.
- Tax
- Equity compensation
- Withholding
RSU taxation happens in two steps. Restricted stock units (RSUs) are your employer’s promise to deliver shares later. When the shares are delivered, their full market value is ordinary income, taxed like salary. When you later sell them, any change in value since delivery is a capital gain or loss. Nothing is taxed at grant, and no 83(b) election, a choice to be taxed early, is available.
At a private company, the first step usually waits for a second trigger: an IPO or an acquisition. So years of vested units can become taxable on one day. Employers withhold federal income tax at a flat 22% on the first $1 million. That often falls well short of the real bill.
22%
Federal withholding on supplemental wages such as RSU income, 37% above $1 million in a calendar year
$184,500
Wage cap for the 6.2% Social Security tax, while Medicare at 1.45% has no cap
37%
Top federal income tax rate, on single taxable income above $640,600
General Information, Not Tax Advice
This page describes US federal rules for tax year 2026 with illustrative numbers. Your result depends on your whole return, your state and the exact terms of your grant. Model it with a qualified tax adviser before the settlement date.
What Is the RSU Tax Treatment?
An RSU is a promise to deliver shares later. No shares change hands when it is granted. The IRS treats it as deferred compensation, meaning pay you receive later. At grant it is not property, so there is nothing to tax and nothing to elect on, as IRS Publication 5992 sets out. So how are RSU grants taxed? They are not. RSU taxation starts only when shares change hands.
Event One: Settlement
When the units vest and the shares are delivered, the value of the shares that day counts as wages. This delivery is called settlement. The income goes on your W-2, the yearly wage statement from your employer. It is taxed at your ordinary income rate and carries Social Security and Medicare tax. That value also becomes your cost basis in the shares, the amount the tax rules treat as what they cost you. The holding period for any later gain starts the same day.
Event Two: Sale
How are RSU shares taxed when you sell? It depends only on the price change since settlement. If you sell above the basis, the difference is a capital gain. It is long-term if you held the shares more than a year. If not, it is short-term and taxed as ordinary income. If you sell below the basis, you have a capital loss. The income from settlement is never recalculated.
Restricted stock units are taxed in full as pay when the shares arrive. The sale only taxes what happened to the price afterward.
When Do RSUs Become Taxable at a Private Company?
A private company cannot deliver taxable shares to employees who have no way to sell them. So most private-company grants are double-trigger. A unit settles only once two things have happened: the time-based vesting schedule and a liquidity event, such as an IPO or a sale of the company. Until the second trigger, units can be fully “vested” in the plan’s language and still not be income.
The result is a bunching of income. Four years of units can settle in the first weeks after a listing, at the public price, in a single tax year. Meanwhile the shares themselves are still under an IPO lock-up, a period after the listing when insiders cannot sell. That is why most companies cover the tax by withholding shares, so employees do not have to pay in cash.
Some private companies offer a second deferral. Under Section 83(i), an eligible employee of a company with no publicly traded stock can elect to defer income tax on settled shares. The election must be made within 30 days. The deferral lasts up to five years, or until an earlier event such as a listing. The company must have a written plan that grants options or RSUs to at least 80% of its US employees. Owners of 1% or more and the top officers are excluded. Few companies run such a plan, so ask before assuming one exists.
What Is the RSU Tax Rate?
There is no separate RSU tax rate. The income is added to your salary and taxed at your marginal rate, the rate on your last dollar of income. That is why how much RSUs are taxed varies so much from person to person. The rates that apply in 2026:
Joint filers have different income thresholds for the Additional Medicare Tax and the net investment income tax. Employers withhold the 0.9% on wages above $200,000 regardless of filing status
As of October 2026 · IRS Publication 15 (2026), Topics 409, 559 and 560, IR-2025-103
RSU Tax Withholding: Why 22% Rarely Covers the Bill
Employers treat RSU income as supplemental wages, meaning pay outside your regular salary. They usually withhold federal income tax at the flat 22% rate set in Publication 15. The rate switches to a mandatory 37% only on supplemental wages above $1 million in the year. Your marginal rate may be 32%, 35% or 37%. If so, you still owe the gap between 22% and that rate. You pay it in estimated payments during the year or with your return.
The employer covers the withholding in one of three ways. It can hold back some shares, called net settlement. It can sell some of the delivered shares on your behalf, called sell-to-cover. Or it can collect cash from you. In each case, you keep fewer shares than the number of units that vested.
RSU Tax Example: 10,000 Units Settling at an IPO
A single employee earns $216,100 in salary in 2026 and takes the $16,100 standard deduction. Taxable income before any RSUs is $200,000. The company lists, and 10,000 double-trigger units settle shortly after the listing at $40 a share.
Illustrative figures for a hypothetical employee. The extra income runs through the 24%, 32% and 35% brackets. State tax is not shown
Computed on the 2026 single brackets and standard deduction (IR-2025-103) and 2026 withholding rates (IRS Publication 15, Topic 560)
The $88,000 withheld covers about 64% of the $138,171 income tax. Now the sale. Say the 7,565 shares are sold thirteen months later at $50. The $75,650 gain is then long-term. If they are sold at $25 instead, the $113,475 is a capital loss. It offsets other gains, but only $3,000 a year can be set against salary. The $138,171 of income tax, calculated at $40, does not change either way.
RSU Tax Implications: Mistakes to Avoid
- Treating withholding as the billThe 22% is a prepayment. Compare it with your marginal rate and set money aside for the difference.
- Counting the basis twiceThe settlement value is already on your W-2. If a broker form shows a basis of zero, use the settlement value. Otherwise you pay tax on the same income again.
- Holding to “save tax”Keeping shares after settlement is an investment decision. It changes the tax on the later gain. It never changes the tax on the income already recognized at settlement.
- Forgetting the bunching yearAn IPO can settle several years of units at once. Time estimated payments, deductions and charitable plans to that year.
- Ignoring the stateIf you moved while the units vested, more than one state may tax part of the income.
Shares from settled RSUs can count as qualified small business stock, which lets part of a later gain go untaxed under Section 1202. They qualify only if the company still passed the Section 1202 tests on the settlement date. That is rare at a listing and possible after an early-stage acquisition. Options work differently: see ISO vs NSO and AMT.
For RSUs, the tax is set on the settlement date, at that day’s price. The planning has to happen before that date.
The Terms This Page Uses
- Restricted stock unit (RSU)
- A promise to deliver a share, or its cash value, once vesting conditions are met. Not taxed until settlement.
- Settlement
- The delivery of shares for vested units. The value that day is wages and becomes the cost basis.
- Double-trigger
- A grant that settles only after both the time schedule and a liquidity event, the usual form at private companies.
- Supplemental wages
- Pay outside regular salary, such as bonuses and RSU income. Federal withholding is 22%, or 37% above $1 million in a year.
- Marginal rate
- The tax rate on your last dollar of income. RSU income is taxed at this rate.
- Cost basis
- What the shares count as having cost for the later sale: for RSUs, their value at settlement.
- Sell-to-cover
- Selling part of the delivered shares to pay the withholding, so the employee keeps the rest.
- 83(b) election
- A choice to be taxed on restricted stock when it is issued instead of when it vests. It is not available for RSUs.
- IPO lock-up
- The period after a listing in which existing holders may not sell. RSUs often settle during it.
Questions About RSU Taxes
Yes, once they settle. The value of the shares delivered is ordinary income, reported on your W-2 with tax withheld. Units that have not yet settled are not income yet. That includes double-trigger units waiting for a liquidity event.
As wages, at their market value on the day the shares are delivered, which is usually the vesting day. Income tax, Social Security up to the wage base and Medicare all apply. The employer withholds by keeping or selling some of the shares.
No. An RSU is not property transferred to you, so Section 83(b) does not apply. An 83(b) election is for restricted stock actually issued to you before it vests. It also covers unvested shares from an early option exercise.
The arithmetic is the worked example above: settlement value times your marginal rate, minus the 22% withheld, plus Social Security and Medicare. A calculator is only as good as the rest of the return you feed it. Run it on the whole year, with your salary and other income included.
Only on the change in price after settlement. Your basis is the value already taxed as wages, so a sale at that price produces no further tax. A sale above it produces a capital gain. A sale below it produces a capital loss.
Where Every Figure on This Page Comes From
Every rate and threshold was checked against the IRS and the US Code on October 1, 2026, and applies to tax year 2026. The worked example is illustrative arithmetic on those figures. State income tax is not covered.
- 01Internal Revenue Service2026Publication 15 (2026) — 22% and 37% supplemental withholding, 6.2% Social Security to $184,500, 1.45% Medicare
- 02Internal Revenue Service06.2024Publication 5992 — RSUs not property under §83, no 83(b) election, taxed on vesting; §83(i) deferral
- 03Internal Revenue ServiceCurrentTopic 560 — 0.9% Additional Medicare Tax and the $200,000 withholding threshold
- 04Internal Revenue Service10.09.2025IR-2025-103 — 2026 tax brackets and standard deduction
- 05Internal Revenue Service2025Topic 409 — long-term holding period and the $3,000 capital-loss limit
- 06Internal Revenue ServiceCurrentTopic 559 — 3.8% net investment income tax
- 07US Code (Cornell LII)Current law26 USC 83(i) — qualified equity grants, five-year deferral, 80% plan rule
This page explains how a market works. It is not investment advice, not a recommendation of any security, strategy or company, and not an offer to sell or a solicitation to buy anything. Private companies may never list or be acquired, positions in them can be illiquid for years, and the entire amount invested can be lost. Figures are accurate as of the dates shown and change. Requirements for investor status, and the tax treatment of a private holding, differ by jurisdiction — the jurisdiction is named wherever this page discusses either. Prepared by the AXEVIL Capital research team. Tax rules described here are United States federal rules unless another jurisdiction is named; they change every year and depend on your own facts. Nothing here is tax advice — take your documents to a qualified adviser.
What closed on the private market in the past two weeks
The rounds that priced, the tender offers that opened and the listings that filed — with the structure of each deal and the date on every figure. Written by the team that reads the paperwork.
Where to go from here
Equity compensationWhat Are Restricted Stock Units (RSUs)? How They Work and ExamplesAn RSU, or restricted stock unit, is a company’s promise of shares that vest over time. How RSUs work at a private company, the second trigger and an example.
TaxesWhat Is Qualified Small Business Stock (QSBS)? Definition and ExamplesWhat is QSBS? Qualified small business stock can take the federal tax off part or all of a startup gain. Which shares qualify and how much gain is excluded.
TaxesWhat Is the Alternative Minimum Tax (AMT)? How It Works and ExamplesThe alternative minimum tax is a second way to work out US income tax. Exercising incentive stock options can trigger it before you sell. Rules for 2026.
IPOs & listingsWhat Is an IPO Lock-Up Period? Definition, How It Works and ExamplesAn IPO lock-up period is an agreement that stops insiders and pre-IPO holders from selling after a listing, often for 180 days. Terms, early release and expiry.