How are Restricted Stock Units (RSUs) Taxed? Reporting & Double Taxation Confusion Explained

Restricted Stock Units (RSUs) are one of the most common forms of equity compensation in the technology sector. They are also one of the most frequently misunderstood types of equity when it comes to taxes.

Most confusion around RSUs doesn’t stem from tax law itself. It comes from how RSUs are reported across multiple tax forms, how withholding differs from actual tax liability, and why RSUs can appear to be taxed twice even when they aren’t.

This article explains RSU taxation in detail: how RSUs are taxed at vest, how sales are taxed later, how everything appears on your tax return, and where reporting errors and underpayment problems typically arise.

• RSUs create two tax events: ordinary income at vesting and capital gain or loss when shares are sold. Confusing these is the root of most mistakes.
• Vesting is taxed like a cash bonus: the fair market value at vesting is treated as wages and included on your W-2.
• Sell-to-cover is only withholding, not your final tax bill: the flat rates used by employers often don’t match your true marginal tax rate.
• RSUs are not taxed twice, but they can look that way: incorrect or missing cost basis on a 1099-B must be fixed on Form 8949 to avoid overpaying tax.
• Timing and location matter: large or late-year RSU vests can trigger underpayment penalties without proactive planning.

RSUs create two separate tax events, each governed by different rules:

1. Compensation income at vest
2. Capital gain or loss when shares are sold

Understanding the distinction between these two events is critical. Most RSU tax mistakes happen when these stages are blurred together.

At vest, RSUs are treated as compensation. After vest, they behave like any other stock you own.

When RSUs vest, you are no longer subject to forfeiture conditions. At that moment, the IRS treats the shares as if your employer paid you cash equal to their value and you immediately used that cash to buy stock.

Tax treatment at vest

At vesting:

• The fair market value (FMV) of the shares on the vest date is treated as ordinary wage income
• This income is:
  • Included in Box 1 of your W-2
  • Subject to federal income tax
  • Subject to state income tax
  • Subject to Social Security and Medicare, up to applicable limits

From a tax perspective, vesting RSUs are essentially the same as receiving a cash bonus and immediately using it to buy company stock.

No AMT exposure for RSUs

Unlike incentive stock options, RSUs do not trigger Alternative Minimum Tax (AMT). RSU income is taxed as wages and treated the same under both the regular tax system and AMT. This simplifies planning compared to option-heavy compensation structures.

Because RSUs generate taxable income at vest, employers are required to withhold taxes at that time. Most employers do this using a sell-to-cover process.

How sell-to-cover works

Under sell-to-cover:

• A portion of the vested shares is automatically sold
• The cash proceeds are used to cover the required tax withholding
• The remaining shares are delivered to your brokerage account

This approach eliminates the need for you to write a check for taxes at vest. However, it’s important to understand what sell-to-cover does—and what it doesn’t do.

Withholding is not your final tax bill

Employers typically treat RSU income as supplemental wages and withhold federal tax using a flat rate:

• 22% on supplemental wages up to $1 million (per calendar year)
• 37% on amounts above $1 million

State withholding is often flat as well.

These rates may be higher or lower than your actual marginal tax rate. Payroll withholding does not account for:

• Bonuses
• A spouse’s income
• Prior RSU vests
• Investment income
• Changes in filing status

As a result, sell-to-cover satisfies withholding requirements, but it does not guarantee that enough tax has been paid for the year. The only way to know whether withholding is sufficient is to project your total annual income and compare the expected tax to what has actually been withheld.

RSU income is embedded in your wages rather than reported separately.

Key W-2 boxes

• Box 1: Includes salary, bonuses, and RSU income combined
• Box 3 (Social Security wages): Includes RSUs up to the Social Security wage base
• Box 5 (Medicare wages): Includes RSUs with no income cap
• Box 14 or attachments: Some employers disclose RSU income separately here, but this is optional

Because RSUs are already included in Box 1, you should not add RSU income again on your tax return if the W-2 is correct.

Once RSUs have vested, you own the shares outright. From that point forward, they are treated like any other stock investment.

Cost basis for RSUs

Each RSU share has a cost basis equal to the fair market value at vest, because that value was already taxed as ordinary income.

Capital gains taxation

When you sell RSU shares:

• Capital gain or loss = sale proceeds minus vest-date FMV
• The holding period begins on the vest date:
  • Sold within one year → short-term capital gain or loss
  • Sold after one year → long-term capital gain or loss

Selling immediately after vest often results in little or no capital gain or loss. Holding introduces market risk and potential capital gains exposure.

RSUs are not taxed twice but reporting issues can make it appear that way.

Here’s why the confusion arises:

• Your W2 reports the income at vest
• Your 1099-B reports the sale proceeds when shares are sold

The 1099-B does not know that part of the proceeds were already taxed as wages.

The real problem: cost basis reporting

Brokerage 1099-Bs may:

• Show zero cost basis
• Show partial basis
• Flag shares as non-covered
• Omit the vest-date basis entirely

If you report the sale without correcting the basis, the IRS may treat the entire sale as taxable capital gain.

How to report correctly

When RSU shares are sold, the transaction must be reported separately from the wage income already included on your W-2.

Each sale of RSU shares is reported on Form 8949, which is where capital gains and losses are calculated. Your broker will issue a Form 1099-B reporting the sale proceeds and cost basis. While the basis is usually reported correctly, there are cases where it may be missing or incomplete. When this occurs, the basis must be adjusted on Form 8949 using the appropriate adjustment code to ensure income already taxed is not taxed again.

Because the value of the shares was already taxed as ordinary income at vest, the correct cost basis is the fair market value on the vest date. If the 1099-B shows a zero or incomplete basis, you must adjust it on Form 8949. Failing to do so can cause the IRS to treat the entire sale proceeds as taxable gain.

The totals from Form 8949 then flow to Schedule D, where capital gains and losses are summarized on your return.

This reconciliation step is essential. It ensures that only the change in value after vest is taxed as a capital gain and prevents the same RSU income from being taxed twice.

RSUs create additional challenges for California taxpayers, largely because of how the state’s tax system treats high income and the timing of payments.

Income thresholds matter. Large RSU vests can push total income above $1 million, which eliminates the prior-yearsafe harbor and triggers California’s additional 1% Mental Health Services Tax. When that happens, required payments during the year increase sharply, even if the income spike is temporary.

Timing matters more than totals. California’s estimated tax system is front-loaded. Paying the full tax by year-end is not always enough to avoid penalties if payments were not made early in the year. Late-year RSU vests are a common source of underpayment penalties, particularly when sell-to-cover withholding is the only tax payment made.

This is why RSU income in California often requires proactive tax planning around both how much tax is paid and when it is paid.

RSUs are compensation first and investments second. They represent earned income that happens to be delivered in shares, not a discretionary stock position. Because of that, RSUs affect taxes, cash flow, and portfolio risk in ways that aren’t obvious if they’re treated as “free stock.”

Planning around RSUs as part of total compensation rather than as a one-off equity event helps reduce tax surprises and avoid unintended concentration.

RSU taxation is conceptually simple but operationally complex. Most problems arise at the intersection of payroll reporting, brokerage reporting, and tax payment timing.

For investors whose compensation includes meaningful equity, a coordinated approach often makes the difference between reacting to tax surprises and planning for them in advance.

Summitry is a financial advising and wealth management firm specializing in equity compensation in the Bay Area. We’ve helped thousands of clients understand RSU taxation, coordinate federal and California obligations, and integrate equity into a broader financial plan, so compensation works as intended.

Are RSUs taxed twice?

No. RSUs are taxed once as wages at vest, and only the post-vest price change is taxed when shares are sold. Reporting errors can make it look like double taxation.

Do RSUs trigger AMT?

No. Unlike incentive stock options, RSUs are treated the same under regular tax and AMT.

Why does my 1099-B show a $0 cost basis?

Many brokers do not include a vest-date basis for RSUs. You must adjust the basis on Form 8949.

Is sell-to-cover enough to cover my taxes?

Often not. Sell-to-cover handles withholding, but does not account for your full tax situation.

When does the holding period start?

The holding period begins on the vest date, not the grant date.

This material is intended for general informational purposes only, and should not be construed as legal, tax, investment, financial, or other advice. It does not consider the specific investment objectives, tax and financial condition or needs of any specific person. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Investing involves the risk of loss, including loss of principal.