How Are RSUs Taxed?
Vesting, Withholding & the Hidden Tax Bill

RSUs are taxed at two distinct moments

Restricted stock units are not taxed when they're granted. They're taxed when they vest, and then again — on a different amount — when you sell. Confusing these two events is what costs engineers tens of thousands of dollars every spring.

At vest, the full value of the shares becomes ordinary income. The IRS treats it exactly like salary. The amount is simple: shares vested × the fair market value (FMV) on the vest date. If 200 NVDA RSUs vest at $1,500, that's $300,000 added to your W-2 Box 1 — taxed at your full marginal rate, plus FICA, plus state. There is no special equity-comp rate. It's wage income.

From that moment, the shares are just stock you own with a cost basis equal to the FMV at vest. Any move after vest is a capital gain or loss — the second taxable event. For the full lifecycle of how RSUs work, start with the pillar: What Are Restricted Stock Units?

Grant to sale: where tax actually hits

Notice that vesting and the start of the capital-gains clock are the same date. That FMV-at-vest number is doing double duty: it's both the income you already paid tax on and your cost basis going forward. Remember it — it's the source of the most expensive RSU mistake, covered below.

How your employer withholds at vest

When RSUs vest, your employer treats the value as supplemental wages and withholds under the IRS supplemental wage rules. The default federal rate is a flat 22% on supplemental wages up to $1M in a calendar year, and 37% on any portion above $1M. On top of that comes the rest of the payroll stack.

There are three ways the withholding actually gets paid: sell-to-cover (the broker automatically sells just enough vested shares to cover withholding and you keep the rest — the most common default), net/share withholding (the company holds back shares and remits cash, so you never receive the withheld shares at all), and cash transfer (you pay the withholding from your own pocket and keep all the shares). Most tech employers default to sell-to-cover.

For the deeper mechanics of vesting schedules and exactly how sell-to-cover executes share-by-share, see RSU Vesting Schedules & Sell-to-Cover.

Why 22% withholding leaves you owing in April

Here's the problem that blindsides nearly every senior engineer. If your total income puts you in the 32%, 35%, or 37% federal bracket, but your employer only withholds 22% on your RSU vest, you are under-withheld by 10–15 percentage points on every vested dollar. The IRS doesn't forgive that gap — it just shows up as a balance due when you file.

Above $1M in supplemental wages for the year, the excess is withheld at 37% — which roughly matches the top bracket and largely closes the gap on that portion. The danger zone is the first $1M, where the flat 22% under-withholds high earners. Run your own number with the tax calculator.

The $0 cost basis that makes you pay twice

This is the single most valuable practical tip in RSU taxation, and almost nobody catches it on their own. When you sell vested RSU shares, your broker issues a 1099-B — and brokers like Schwab, E*Trade, Fidelity, and Morgan Stanley routinely report your cost basis as $0 (or only the small discount), not the FMV at vest.

Why that's a disaster: you already paid ordinary income tax on the FMV at vest — that value went through your W-2. Your correct cost basis is that same FMV. If the 1099-B says basis is $0, your tax software computes the capital gain as the entire sale price, taxing you a second time on income you already paid tax on. On a $300K position sold near vest value, that error can mean paying tax twice on ~$300K.

For the line-by-line walkthrough of 1099-B, Form 8949, and reconciling your W-2 — read the deep dive: RSU Tax Reporting & Cost Basis.

State tax and the multi-state vesting wrinkle

RSU income is state-taxable wage income, and high-tax states make the bill meaningfully worse. California can add up to 13.3% on top of federal; New York City residents stack state plus city. In a no-income-tax state — Texas, Washington, Florida, Nevada — the state piece is zero. For a Bay Area engineer, state tax alone can be the difference between a 37% and a ~50%+ all-in marginal rate on each vest.

The wrinkle most people miss: states generally tax RSU income based on where you worked during the vesting period, not just where you live when shares vest. If you earned a 4-year grant while working in California and then moved to Texas before it vested, California can still claim its share of the income attributable to the time you worked there. Multi-state and cross-border employees can face double-source claims and need to allocate carefully — this is a 'talk to a tax pro' situation, not a DIY one.

Covering the gap — and what to do with the shares

Two problems live downstream of every vest. First, the immediate cash-flow problem: covering the under-withholding so April isn't a five-figure shock. Second, the slower-burning concentration problem: each vest piles more of your net worth into a single employer's stock that you've already paid full income tax to acquire.

On the cash-flow side, the move is mechanical — reserve the gap, file estimates, tune your W-4. On the concentration side, your choices have very different tax consequences. Selling to diversify means a capital gains bill on top of the ordinary-income bill you already paid at vest. Before you do that, price it out: The Real Cost of Selling Appreciated Stock.

That last path is where Embark fits: once your RSUs have vested and appreciated, the §721 SPV lets you generate income and dilute concentration risk without triggering the capital gains tax that selling would. It's the sophisticated alternative for engineers sitting on a large, already-taxed-at-vest position.

Common RSU tax questions

Are RSUs taxed at grant or at vest?
At vest. A grant is just a promise of future shares — no tax. The taxable event is vesting, when shares are delivered and their full FMV becomes ordinary income on your W-2 Box 1. (RSAs differ: they're real shares at grant and can elect 83(b).)

Why do I owe taxes in April if my company already withheld?
Because the default 22% supplemental withholding rate is usually less than your true marginal rate (32–37% for most senior engineers). The shortfall — often $30K–$100K+ — comes due at filing. Set the gap aside at each vest or make quarterly estimates.

What is my cost basis on RSUs?
The FMV per share on the vest date — the same value you already paid ordinary income tax on. When you sell, capital gain = sale price − FMV at vest. Watch for brokers reporting $0 basis on the 1099-B; correct it on Form 8949 or you'll be taxed twice.

What does Box 14 'RSU' on my W-2 mean?
It's informational, not a separate tax. It restates the vested RSU value that's already included in Box 1, to help you (and your tax software) reconstruct cost basis. Don't add it again as income.

Is sell-to-cover taxable?
The shares sold to cover withholding are sold at — or extremely close to — the FMV at vest, so they generate little or no capital gain. The withholding itself isn't a separate tax; it's a prepayment toward the ordinary income tax already triggered by the vest.

Short-term vs long-term — when does the clock start?
On the vest date, not the grant date. Hold more than one year from vest for long-term capital gains treatment on any appreciation. Sell sooner and the gain is short-term — taxed at ordinary rates. Either way, the vest itself was already taxed as income.