How Restricted Stock Is Taxed at Vesting and Sale

Restricted stock is taxed as ordinary income when the shares vest, based on their fair market value on that date, and any later change in price is a capital gain or loss when you sell. That is the core of how restricted stock is taxed, but the details depend on whether you hold Restricted Stock Units (RSUs) or Restricted Stock Awards (RSAs), whether you filed a Section 83(b) election, and how much your employer actually withheld against what you owe.

RSUs and RSAs Follow Different Tax Paths

An RSU is a promise from your employer to deliver shares (or cash) once you meet the vesting conditions. You do not own stock at grant. You have no voting rights, no dividends, and nothing sitting in a brokerage account. Because no property has been transferred, the grant itself is not taxable.¹

An RSA transfers actual shares to you on the grant date. You become a shareholder immediately and may receive voting rights and dividends right away.² The shares are still subject to a substantial risk of forfeiture, meaning your employer can take them back if you leave or miss a performance target before vesting. Once that risk drops away, the shares are “substantially vested” and the primary tax event lands.

The Tax Hit at Vesting

For RSUs, the taxable event happens when the shares are delivered to you, which is typically the vesting date. The full fair market value of the delivered shares counts as ordinary income, identical to a cash bonus for tax purposes.³ If 100 shares vest at $50, you recognize $5,000 in ordinary income that day, whether or not you sell.

For RSAs without an 83(b) election, the rule is the same: ordinary income tax on the fair market value when the shares become substantially vested.¹ If the stock climbed between grant and vesting, you owe tax on the higher vesting-date value. Dividends received before vesting are taxed as ordinary compensation rather than as qualified dividends.

The vested income is subject to federal income tax, Social Security tax (up to the 2026 wage base of $184,500 in combined earnings), and Medicare tax.⁴ It shows up on your W-2 alongside your salary in Box 1 (wages), Box 3 (Social Security wages, capped at the wage base), and Box 5 (Medicare wages, uncapped).⁵ The W-2 does not break equity income out on a separate line; to see the equity portion, check your brokerage’s year-end summary or your employer’s stock plan administrator records.

The Section 83(b) Election for RSAs

The Section 83(b) election lets an RSA recipient move the tax event from vesting back to the grant date. You pay ordinary income tax immediately on the grant-date value.¹ If the stock is worth very little at grant, which is common at early-stage startups, the upfront tax can be minimal. All later appreciation then qualifies for long-term capital gains rates once you meet the holding period, and that holding clock starts on the grant date rather than at vesting.

The election is generally not available for RSUs. Because RSUs are a contractual promise rather than a transfer of property, there is no “property” at grant for Section 83(b) to apply to.

Filing the Election

You must file the 83(b) with the IRS within 30 days of the grant date. The written statement must include your name, address, taxpayer ID, a description of the property, the grant date, the fair market value at transfer, any amount you paid for the shares, and a description of the forfeiture restrictions.⁶ Give a copy to your employer and include a copy with your income tax return for that year. Send the election by certified mail with return receipt; that receipt is your only proof of a timely filing. The 30-day window is permanent, and the IRS does not grant extensions.

The Downside

The tax you prepay is not refundable. If you leave and forfeit the shares, the ordinary income tax you already paid is gone. If the stock price drops between grant and vesting, you will have paid tax on a higher value than the shares turn out to be worth. The election makes sense when the grant-date value is low and you have real conviction the stock will appreciate.

Why Your Withholding May Fall Short

Employers withhold on vested restricted stock the way they withhold on a bonus. The default federal income tax rate on supplemental wages is a flat 22% up to $1 million per year, jumping to 37% on the portion above $1 million.⁷

That flat 22% is the trap. If your combined salary and vested stock put you in the 32% or 35% bracket, the withholding does not cover your actual liability. You owe the difference at filing, and if the gap is large enough you may face an underpayment penalty on top of it. The IRS charges interest based on the amount owed and how long it went unpaid.⁸ If you know a large vesting is coming, either make an estimated tax payment for that quarter or ask payroll to raise your regular withholding for the rest of the year.

The mechanics of the withholding itself vary. Under sell-to-cover, a portion of newly vested shares is sold automatically to raise the cash for taxes. Under net share settlement, the employer keeps a portion of the shares and remits cash to the tax authorities, delivering only the net shares to you. Either way, the withheld shares are treated as sold at fair market value on the vesting date.

Selling the Shares: Capital Gains

Once shares are vested (and, for RSUs, delivered), any further price movement is a capital gain or loss. Sale price minus cost basis is your gain. Your cost basis is the fair market value on the vesting date for RSUs and for RSAs without an 83(b), or the fair market value on the grant date for RSAs where you filed an 83(b).

The rate depends on how long you held after that basis date:

One year or less: short-term capital gain, taxed at your ordinary income rate.⁹
More than one year: long-term capital gain, taxed at 0%, 15%, or 20% depending on your taxable income.⁹

For 2026, the 0% long-term rate covers taxable income up to $49,450 for single filers and $98,900 for joint filers. The 15% rate runs up to $545,500 single and $613,700 joint. Above those thresholds the rate is 20%.

For RSAs with an 83(b), the holding period starts at grant, so by the time shares vest under a four-year schedule the earliest tranches may already qualify for long-term rates. For RSUs, the clock starts when the shares are delivered, which is typically the vesting date. Report the sale on Schedule D, pulling from Form 8949.

The Cost Basis Mistake That Causes Double Taxation

This is where taxpayers routinely overpay. When you sell vested shares, your broker issues Form 1099-B reporting the proceeds and the cost basis. For equity compensation shares, the reported basis is often wrong: brokers frequently report zero, or they report the amount you paid without adjusting for the income you already recognized at vesting.

Copy those figures onto your return unchanged and you pay capital gains tax on the full sale price rather than on the appreciation since vesting. That is the same income taxed twice, once as ordinary wages at vesting and again as a capital gain at sale.

Fix it on Form 8949. If the broker reported basis to the IRS but the number is wrong, enter the broker’s basis in column (e), put the adjustment in column (g), and mark code “B” in column (f).¹⁰ If the broker did not report basis to the IRS, enter the correct basis directly in column (e) and put zero in column (g). Your correct basis is the fair market value on the vesting date, which should match the income reported on your W-2 for those shares. Keep the W-2, your brokerage vesting confirmations, and any equity compensation statements together in case the IRS asks.

Additional Taxes at Higher Incomes

Two extra taxes can apply once restricted stock pushes your income up, and neither is fully handled by your employer’s standard withholding.

The Additional Medicare Tax adds 0.9% on wages above $200,000 for single filers or $250,000 for joint filers.¹¹ Employers begin withholding it once your wages pass $200,000 regardless of filing status, so joint filers can be over-withheld while single filers with multiple income sources can be under-withheld.

The Net Investment Income Tax adds 3.8% on the lesser of your net investment income or the amount by which your modified adjusted gross income exceeds $200,000 single or $250,000 joint.¹² The ordinary income you recognized at vesting is compensation and is not subject to NIIT, but the capital gain when you sell the shares is. At the top bracket, that means an effective 23.8% on long-term gains from selling restricted stock.

The Timeline That Keeps Filing Clean

Restricted stock taxes arrive in stages, and each stage has its own rules:

Grant date, RSAs: file an 83(b) within 30 days and pay ordinary income tax on the grant-date value, starting the capital gains clock. Skip the election and nothing happens tax-wise yet.
Grant date, RSUs: no taxable event, because no shares have been transferred.
Vesting date: for RSUs and RSAs without an 83(b), the fair market value of the shares is ordinary income; the employer withholds and reports on your W-2.⁵
Sale date: gain above cost basis is a capital gain. Check your holding period. Correct the basis on Form 8949 if the 1099-B is wrong.
Filing: match W-2 income against your equity records, report sales on Schedule D, and adjust estimated payments if the flat 22% withholding did not cover your bracket.

1
Office of the Law Revision Counsel. 26 U.S. Code 83 – Property Transferred in Connection With Performance of Services
2
Charles Schwab. Restricted Stock: RSUs and RSAs
3
eCFR. 26 CFR 1.83-1 – Property Transferred in Connection With the Performance of Services
4
Social Security Administration. Contribution and Benefit Base
5
National Association of Stock Plan Professionals. Year-End Tax Reporting Questions Answered – Equity Compensation
6
Federal eLaws. 26 CFR 1.83-2 – Election to Include in Gross Income in Year of Transfer
7
Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide
8
Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty
9
Internal Revenue Service. Topic No. 409 Capital Gains and Losses
10
Internal Revenue Service. Instructions for Form 8949
11
Internal Revenue Service. Questions and Answers for the Additional Medicare Tax
12
Office of the Law Revision Counsel. 26 U.S. Code 1411 – Imposition of Tax