RSU Taxes Explained: Don't Get Double Taxed

If you work in tech, you probably get RSUs. You probably think: “They withhold taxes when they vest, so I’m good.” Wrong. You are at high risk of paying tax on the same money twice if you don’t adjust your tax return.

Key Takeaways

• Vesting = Income. The value of the shares on vesting day is added to your W-2 wages.
• Selling = Capital Gain/Loss. Any change in value *after* vesting is a capital gain/loss.
• The Trap: Brokers often report the Cost Basis as $0 on the 1099-B.
• The Fix: You must manually adjust the basis to the vesting price (which you already paid tax on via payroll).

The Mechanics of RSU Taxation

1. Grant Date: You get a promise of 1,000 shares. Tax: $0.
2. Vesting Date: The stock is $100. You get 1,000 shares ($100k value).
   • Tax: Your company sells ~300 shares to pay the IRS (Supplemental Rate 22%).
   • Income: $100,000 is added to Box 1 of your W-2.
   • Net: You keep 700 shares.
3. Sale Date: You sell the 700 shares later for $110.
   • True Gain: ($110 - $100) * 700 = $7,000.
   • Broker Report: Brokers often report the basis as $0. They tell the IRS you gained ($110 - $0) * 700 = $77,000.

The Double Tax Disaster

If you upload that 1099-B without correction, the IRS thinks you made $77,000 profit. But $70,000 of that was already taxed on your W-2. You serve the income tax on the W-2 AND capital gains tax on the 1099-B.

Always check Box 1g or the “Supplemental Info” on your 1099-B. You likely need to file Form 8949 with code ‘B’ to adjust the basis.

RSU Tax Strategy: After Vesting

Once shares vest, you have a decision: hold or sell. Here is how to think about it from an RSU tax strategy perspective:

• Sell immediately: You lock in the value and eliminate concentration risk. The gain (or loss) is minimal because the shares were just valued for your W-2. Any gain is short-term unless you hold for 12+ months after vesting.
• Hold for long-term rates: If the stock goes up and you hold for over a year past vesting, the gain qualifies for long-term capital gains rates — 0%, 15%, or 20% instead of your ordinary income rate. See our capital gains tax rates guide for the current brackets.
• Harvest losses: If the stock drops after vesting, selling crystallizes a capital loss you can use to offset other gains through tax loss harvesting. Be aware of the wash sale rule if you plan to repurchase.
• Asset location: If you hold RSU proceeds in a brokerage account, consider asset location strategies to place tax-inefficient holdings in tax-advantaged accounts.

RSU Withholding and the Underwithholding Trap

Most companies withhold at the supplemental rate of 22% on vesting. If your marginal tax rate is 32% or higher, you will owe the difference at tax time. High-income earners should plan for this gap by adjusting their W-4 withholding or making estimated tax payments.

If you earn over $200,000 ($250,000 married), RSU vesting income can push your MAGI above the threshold where the 3.8% Net Investment Income Tax (NIIT) kicks in on your investment income (dividends, capital gains, etc.). The 0.9% Additional Medicare Tax applies directly to the W-2 wages themselves.

RSUs vs ESPPs

If your employer also offers an Employee Stock Purchase Plan, the tax mechanics are different. ESPPs involve your own after-tax dollars and come with qualifying/disqualifying disposition rules. See our ESPP tax guide for the details.

RSUs vs Stock Options (ISOs and NSOs)

Stock options work differently from RSUs. With options, you pay tax on the “bargain element” (the spread between strike price and market price). ISOs can trigger the Alternative Minimum Tax (AMT), while NSOs are taxed as ordinary income at exercise. For a detailed comparison, see our stock options guide. If you received options at an early-stage company, an 83(b) election might save significant taxes.

How sharper.tax Helps

sharper.tax analyzes your uploaded return and flags 1099-B entries that show a $0 or missing cost basis---the telltale sign of the RSU double-taxation trap. We calculate the correct adjusted basis so you can file Form 8949 accurately. Sophisticated tax planning used to require a high-end CPA --- we make it available for free.

Sources

• IRS Publication 525 (Taxable and Nontaxable Income)
• IRS Form 8949 Instructions (Sales and Other Dispositions of Capital Assets)
• IRS Topic No. 427 (Stock Options)

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The information above is educational and not tax advice.