Restricted Stock Units: Tax at Vesting and Concentration Risk

Restricted Stock Units (RSUs) are taxed as ordinary income when they vest, based on the fair market value at vesting. Explore how RSU vesting triggers income recognition, why you should understand 83(b) elections, and how to think about holding versus selling after vesting.

How they're taxed. RSUs aren't taxed when granted. When they vest, the fair market value of the shares on the vesting date is taxed as ordinary income. Your employer withholds taxes, typically by selling a portion of the vesting shares ("sell to cover"). The income appears on your W-2. You pay nothing upfront and make no purchase decision.

No 83(b) election. Unlike restricted stock awards, you cannot file an 83(b) election on RSUs. The IRS treats unvested RSUs as an unfunded promise to deliver shares in the future, not as property you currently own. This means you cannot accelerate the tax event to lock in a lower value.

After vesting. Once shares vest and you own them, any further appreciation is a capital gain. If you hold for more than one year after the vesting date and then sell at a higher price, that additional gain qualifies for long-term capital gains rates. Many people sell immediately at vesting, which means no additional capital gain or loss.

Why timing matters. Large RSU vests can spike your income in a single year, pushing you into higher brackets or triggering Medicare surtaxes. If your company allows, negotiating vesting schedules that spread income more evenly across years can reduce total taxes paid.

The pitfall: People treat vested RSUs as "free stock" and hold indefinitely without considering concentration risk. Once vested, RSUs are just stock. Holding or selling is an investment decision with tax consequences, not a loyalty decision.