RSU Complete Guide 2026: How Restricted Stock Units Work, Vest, and Get Taxed
If your compensation package includes RSUs, you are sitting on real money that requires real planning. Restricted stock units are the dominant form of equity compensation at public tech companies, yet most employees have a surface-level understanding at best. They know the grant number looks good on the offer letter and that some shares appear in their brokerage account after a year or two. What they often miss is the tax complexity, the withholding gap that creates a surprise April bill, and the wash sale traps that can silently erase thousands in deductions.
This guide ties together every RSU topic that matters for the 2026 tax year. Each section gives you a solid working knowledge of the concept, then points you to the deeper resource for the full breakdown. Whether you are a first-time RSU recipient or a senior engineer managing a multi-year vesting ladder, this is your starting point.
What Are RSUs?
A Restricted Stock Unit is a promise from your employer to deliver actual company shares to you after you satisfy certain conditions, almost always a combination of time-based vesting and continued employment. Unlike stock options, RSUs are not a right to buy shares at a fixed price. You do not pay anything out of pocket. The shares are simply granted to you and then released according to a vesting schedule.
At a public company, the process looks like this. Your employer makes a grant on a specific date. That grant specifies a number of shares and a vesting schedule. On each vesting date, a portion of those shares converts from a "unit" (a bookkeeping entry) into actual shares deposited into your brokerage account. You then own those shares the same way you would own any stock, and you can hold or sell them.
The grant price or "grant-date value" that appears on your offer letter is simply the stock price multiplied by the number of RSUs at the time the grant was made. That number is a reference point, not a guarantee. If the stock trades at $80 when you were granted 1,000 RSUs and then falls to $60 by the time the first tranche vests, you receive shares worth $60,000, not $80,000. The inverse is also true.
RSUs are different from stock options in one important way: they always have value as long as the stock is worth anything. Stock options require the stock price to exceed your strike price before you benefit. That makes RSUs the lower-risk, lower-upside form of equity compensation, which is exactly why established public companies prefer them. Startups still lean toward options because of the leverage they provide if the company grows dramatically.
For a side-by-side comparison of RSUs, stock options, and ESPP plans with tax calculations for each, read RSU vs Stock Options vs ESPP: Which Equity Compensation Is Best?.
How RSU Vesting Works
Vesting is the process by which your RSUs convert into shares you actually own. Until vesting, you have a promise. After vesting, you have property.
The most common schedule at large tech companies is a four-year vest with a one-year cliff. This means nothing happens during your first year of employment. On your one-year anniversary, 25 percent of your grant vests all at once. After that, shares typically vest monthly or quarterly for the remaining three years until 100 percent of the original grant has vested. Some companies use a pure time-based quarterly schedule with no cliff at all.
Here is what a standard 1,000-share grant looks like on a four-year schedule:
- Year 1 anniversary: 250 shares vest (the cliff)
- Year 2: 250 shares vest in quarterly installments of 62-63 shares
- Year 3: 250 shares vest in quarterly installments
- Year 4: 250 shares vest in quarterly installments
Once shares vest, two things happen simultaneously. First, the fair market value of those shares on that day is added to your taxable income. Second, the shares are deposited into your brokerage account minus the shares sold to cover tax withholding. More on taxes in the next section.
A few practical details matter here. If you leave the company before vesting, unvested RSUs are forfeited. Vested shares are already yours. Some offers include accelerated vesting clauses that trigger upon acquisition or certain termination events, but these vary widely. Trading windows and blackout periods also interact with vesting: you may receive shares on a vesting date but be prohibited from selling them immediately if the company is in a pre-earnings blackout.
Refresh grants, sometimes called "refresh RSUs," are additional grants companies issue to retain employees after the initial four-year grant runs out. These create a rolling vesting ladder that requires separate tracking for each grant's tax cost basis.
The Real Value of Your RSU Grant
The number on your offer letter is not what you will take home. Understanding the gap between the headline grant value and your actual after-tax benefit is essential before making any major financial decisions based on RSU compensation.
Start with the obvious: the grant-date value assumes the stock price stays the same. In practice, the stock will move up or down between the grant date and each vesting date, sometimes dramatically. A $200,000 grant at $100 per share could vest at $70, $130, or anywhere in between.
The bigger and more predictable gap comes from taxes. When RSUs vest, the entire fair market value of the vested shares is treated as ordinary income. A $50,000 vesting event is taxed the same way a $50,000 bonus is taxed. In a common scenario for a California tech worker in the 32 percent federal bracket:
- $50,000 vesting value
- Federal income tax: ~$16,000 (32 percent marginal rate)
- California state tax: ~$4,650 (9.3 percent marginal rate)
- FICA taxes: ~$3,825 (7.65 percent, though Social Security may be partially capped)
- After-tax value: approximately $25,525
That is roughly 51 cents on the dollar. In lower-tax states like Texas or Washington, the take-home is closer to 60 to 65 cents. But the point stands: your $100K RSU grant is not $100K in your pocket.
There is a second layer to this as well. Most employers use a "sell-to-cover" method at vesting, meaning they sell some of your shares automatically to pay the withholding. You receive fewer shares than your grant originally specified. If your employer withholds at the standard 22 percent federal supplemental rate and your actual marginal rate is 32 percent, you will also owe additional federal tax at filing.
For a full walkthrough of how this math works with real examples, read How RSUs Work: Why Your $100K Grant Is Actually Worth $60K.
How RSUs Are Taxed
RSU taxation has two distinct phases, and confusing them is one of the most common mistakes employees make when filing.
Phase 1: Vesting creates ordinary income. The day your RSUs vest, the fair market value of the shares is added to your W-2 as wages. You pay federal income tax, state income tax (where applicable), Social Security, and Medicare on that amount. This is unavoidable. There is no way to defer RSU income at vesting, no 83(b) election, and no backdoor to convert it into capital gains at this stage.
Phase 2: Sale creates capital gains or losses. After vesting, your cost basis in those shares equals the fair market value on the day they vested. If you sell the shares immediately at the same price, you have zero gain or loss. If you hold and sell later at a higher price, you owe capital gains tax on the difference. Hold for more than one year after vesting and the gain qualifies for long-term capital gains rates (0, 15, or 20 percent depending on your income). Sell within one year and the gain is short-term, taxed at ordinary income rates.
The critical point is that the holding period begins at vesting, not at the grant date. A four-year vesting schedule does not give you long-term capital gains treatment automatically. Each tranche's holding clock starts fresh on its own vesting date.
State taxes add complexity for high-income employees. California, New York, New Jersey, and other high-tax states tax RSU income at rates ranging from 9 to 13 percent on top of federal. If you live in Texas, Florida, Washington, Nevada, or another state with no income tax, you skip this layer entirely. For California residents specifically, even if you move out of state after vesting, California may still claim a portion of the gain based on where you worked during the vesting period.
For a detailed breakdown of how to report both the vesting income and the subsequent sale correctly, including the cost basis issue that trips up many taxpayers, read RSU Cost Basis and Capital Gains: How to Report Vesting and Sales.
For a full explanation of why default withholding leaves most employees short at tax time, read RSU Tax Withholding: Why the 22% Federal Rate Isn't Enough.
RSU Tax Withholding Problems
The single most common RSU-related financial mistake is assuming the default 22 percent federal withholding rate is enough. For many tech employees, it is not.
Here is why. The IRS classifies RSU income as "supplemental wages," which triggers a flat withholding rate of 22 percent for amounts under $1 million. This is convenient for employers because it is simple to implement. But it is disconnected from your actual marginal tax rate.
Consider a software engineer earning $160,000 in salary with $80,000 in RSUs vesting during the year. Their combined income is $240,000, which puts them solidly in the 32 percent federal bracket. But their employer only withheld 22 percent on the RSU income. The gap is 10 percentage points on $80,000, which works out to an $8,000 shortfall at the federal level alone. Add a state gap on top of that and the total underpayment can easily reach $12,000 to $15,000.
That surprise arrives as a tax bill in April. If it exceeds $1,000 and you did not meet safe harbor requirements, the IRS also adds underpayment penalties.
The fix is straightforward but requires action. You have two options. First, adjust your W-4 to request additional withholding from your regular paychecks. Second, make quarterly estimated tax payments directly to the IRS. Either approach works, but both require calculating your expected shortfall first. The right number to target depends on your salary, your vesting schedule for the full year, your state tax rate, and whether you expect to hit the Social Security wage base.
Some employers also allow you to request a higher withholding rate specifically for RSU events. If yours does, that is often the simplest path.
For the detailed step-by-step process of calculating your gap and filling out the W-4 correctly, read RSU W-4 Withholding Adjustment Guide: Avoid a Surprise Tax Bill.
When to Sell RSUs
Deciding whether to sell RSUs immediately or hold them is a question that intersects tax strategy, concentration risk, and personal financial goals. The answer for most employees is more straightforward than it feels.
When RSUs vest, you have already paid ordinary income tax on their full value. There is no additional tax benefit to holding for the first twelve months. The only tax advantage of holding comes after one year, when any gain qualifies for long-term capital gains rates. That savings of roughly 10 to 15 percentage points (depending on your bracket) sounds appealing, but it requires the stock to go up and requires you to tolerate a year of concentrated risk.
Concentration risk is the more pressing concern for most employees. Your career, your income, and your stock compensation are all tied to the same company. If the company struggles, you could face a layoff at the same time your shares are declining. That is a double hit to your financial security. The rule of thumb is to keep no more than 10 to 15 percent of your total net worth in any single stock, including employer stock. Many tech employees with large annual vesting events blow past that threshold quickly if they do not sell regularly.
The sell-immediately strategy eliminates both concentration risk and decision fatigue. You vest, the broker sells all shares, you set aside cash for taxes, and you invest the remainder in diversified index funds. No watching the stock, no agonizing over timing, no accumulating a large position in a single name.
For employees who do choose to hold some shares, the important questions are: What percentage of your net worth does this represent? Do you have an emergency fund and diversified retirement accounts already in place? And would you buy this stock today with your own cash, at current prices, with no employee discount?
A good vesting and sale plan does more than answer the hold-or-sell question once. It creates a repeatable process for every future vest date so you are not making the decision from scratch each quarter. For a simple three-bucket framework (tax bucket, diversification bucket, long-term bucket) and a complete timeline, read When to Sell RSUs: Complete Decision Guide for 2026.
For a practical calendar-based approach that prevents wash sales and tax surprises at the same time, read RSU Vesting and Sale Planning: A Simple Plan.
RSU Wash Sale Traps
RSUs create a wash sale risk that catches many employees off guard. The IRS wash sale rule disallows a capital loss on a stock sale if you buy the same or substantially identical stock within 30 days before or after the sale. The critical insight for RSU holders is this: vesting counts as a purchase.
Every time RSUs vest, the IRS treats it exactly like you went to the market and bought those shares with cash. That means if you sell company stock at a loss and RSUs vest within 30 days, your loss is disallowed.
Here is a concrete example. You hold 100 shares purchased at $200 each. The stock drops to $100. You sell all 100 shares to realize a $10,000 loss for tax purposes. Twenty days later, 50 RSUs vest. The IRS considers that a purchase of 50 shares of the same stock within the wash sale window. The loss on 50 of your shares is disallowed. You lose the deduction on $5,000 of your loss, which in a 32 percent bracket is $1,600 in real money gone.
The disallowed loss is not gone forever. It gets added to the cost basis of the newly vested shares. When you eventually sell those shares, you will get credit for it. But you lose the immediate tax benefit, which matters when you planned to use that loss to offset other gains this year.
The trap is especially dangerous because RSU vesting happens on a schedule you cannot always control. If you hold company stock and try to harvest tax losses near a vesting date, you need to verify the 30-day window does not overlap. The wash sale window is 61 days total: 30 days before the sale, the sale date itself, and 30 days after.
ESPP purchases and dividend reinvestment plans can trigger the same problem. Any automatic acquisition of the same stock within the window counts.
For the full explanation of how wash sales work with RSUs including cost basis adjustments, IRA complications, and a checklist to stay clear, read How to Avoid Wash Sales with RSUs: The 30-Day Rule Explained.
For a broader planning timeline that integrates vesting, sales, and wash sale avoidance into one process, read RSU Vesting and Sale Planning: A Simple Plan to Avoid Wash Sales and Tax Surprises.
Calculate Your RSU Taxes
The fastest way to see your actual RSU tax liability is to use the RSU Tax Calculator. It accounts for federal income tax brackets, state tax rates, FICA taxes, and the Social Security wage base cap. Enter your salary, vesting value, filing status, and state, and it shows you what the IRS expects versus what your employer withheld.
If you are managing a mix of equity comp, multiple vesting events across the year, or past company stock sales that might trigger wash sale issues, the Wash Sale Calculator is a separate tool that lets you enter your trade history and vesting dates to flag any disallowed losses.
Running the numbers before each vesting event takes about five minutes and can save you from an April tax surprise, underpayment penalties, or accidental wash sale losses.
Key Takeaways
RSUs are taxed as ordinary income at vesting. There is no way to defer or convert this to capital gains at the moment of vesting. Plan your cash flow around this.
The 22 percent federal withholding rate is a starting point, not a cap. If your combined income puts you in the 24, 32, or 35 percent bracket, you will owe more. Calculate your gap and adjust your W-4 or make estimated payments.
Your cost basis is the fair market value on the day shares vest. Not the grant price. Not the sale price. The vesting price is where both your ordinary income and your capital gains calculations begin.
Holding for long-term capital gains is only worth it if the stock goes up. The tax savings of 10 to 15 percentage points on the gain must be weighed against concentration risk and the reality that most individual stocks do not beat the market.
RSU vesting creates wash sale risk. If you plan to sell company stock at a loss, check your vesting calendar and maintain a 31-day clear window on both sides. One accidental overlap can cost thousands in disallowed deductions.
State taxes matter. California and other high-income-tax states add 9 to 13 percent on top of your federal rate. No-tax states like Texas and Washington save you that entire layer.
Company stock should not exceed 10 to 15 percent of your total net worth. Your career is already concentrated at one employer. Your investment portfolio should not be.
Use the calculators. The RSU Tax Calculator and Wash Sale Calculator exist precisely to take the guesswork out of equity compensation decisions.
RSUs are a valuable part of compensation, but they require more attention than a simple salary increase. A few hours of planning each year can protect tens of thousands of dollars in real money.
This article is for educational purposes only and does not constitute financial, tax, or legal advice. Tax rules and rates are subject to change. Consult a qualified tax professional for guidance specific to your situation.