How Stock Grants Are Taxed: RSUs, RSAs, and the 83(b) Election

Stock grants from an employer are taxed twice on the same shares, but on different pieces of value. When the shares vest and become yours to keep, their full fair market value is treated as ordinary wage income and shows up on your W-2 alongside your salary. When you later sell those shares, any change in price since vesting is a capital gain or loss. That two-stage pattern is the core of how stock grants are taxed, and almost every other rule (withholding, the 83(b) election, cost basis, the extra taxes on high earners) is a variation on it.

RSUs and RSAs Work on Different Timelines

Most employer stock grants are either Restricted Stock Units or Restricted Stock Awards, and the difference matters for tax because it changes when you own the shares.

An RSU is a promise. Your employer agrees to deliver shares on a future date if you satisfy the vesting schedule. Until vesting, you own nothing: no shares, no voting rights, no dividends. RSUs are the standard grant at public companies.

An RSA is actual stock transferred to you on the grant date, subject to a clawback if you leave before vesting or miss performance targets. That clawback is what the tax code calls a “substantial risk of forfeiture.”¹ RSAs are more common at startups and pre-IPO companies, where the share price at grant is low.

The ownership difference drives the tax difference. Because RSU holders own nothing until vesting, there is no property to tax until shares arrive. Because RSA holders own actual shares from day one, they can accelerate their tax event through a Section 83(b) election. RSU holders cannot.

Ordinary Income When Shares Vest

The moment RSUs vest and shares hit your account, the IRS treats the full fair market value of those shares as compensation. It appears in Box 1 of your W-2 alongside your salary, in Box 3 for Social Security wages (up to the annual wage base), and in Box 5 for Medicare wages. For tax purposes, vested RSUs are indistinguishable from a cash bonus of equal value.¹

RSAs default to the same treatment: without an 83(b) election, ordinary income is recognized when the substantial risk of forfeiture lapses (the vesting date), and the fair market value on that date goes on your W-2.

Rates track your regular income brackets, topping out at 37% federal for 2026.

Withholding Rarely Covers the Full Bill

You owe tax on shares, but the IRS wants cash. Employers usually resolve this with one of two methods:

Sell-to-cover: the brokerage automatically sells enough newly vested shares to fund the tax withholding, and you keep the rest.
Net settlement: the employer holds back a portion of the shares themselves and delivers only the net number to your account.

Either way, RSU income is classified as supplemental wages, so federal income tax withholding is typically a flat 22%. Supplemental wages above $1 million in a year are withheld at 37%.²

That flat 22% is often well below what a high earner actually owes. If your marginal federal bracket is 35% or 37%, add state tax and Additional Medicare Tax, and total tax on the vesting event can top 50% in high-tax states. The gap becomes your problem at filing.

To avoid an underpayment penalty, you generally need to have paid at least 90% of the current year’s tax liability through withholding and estimated payments, or 100% of the prior year’s liability, or you must owe less than $1,000 at filing.³ Employees with large predictable vests should consider a quarterly estimated payment in the quarter the shares vest. Some employers will also withhold at a higher rate than 22% on request, though not all offer this.

Capital Gains When You Sell

After vesting, the shares behave like any other stock you own. Your cost basis is the fair market value on the vesting date, because that amount was already taxed as ordinary income. Any price change between vesting and the day you sell is a capital gain or loss.

The holding period starts on the vesting date. Sell within one year and the gain is short-term, taxed at ordinary income rates. Hold longer than a year and long-term capital gains rates apply: 0%, 15%, or 20% depending on your taxable income.⁴ The 20% rate begins at $545,500 for single filers and $613,700 for married couples filing jointly in 2026.⁵

The gain is the appreciation after vesting, not the total sale price. If 100 shares vested at $50 each and you later sell at $75, the capital gain is $25 per share. The first $50 was already taxed as wages. Miss this and you pay tax twice on the same dollars.

Watch Out for Wash Sales

If you sell company stock at a loss and new RSU shares vest within 30 days before or after that sale, the IRS treats the vest as a purchase of substantially identical securities. The wash sale rule disallows your capital loss for the year.⁶ The disallowed loss is added to the basis of the newly vested shares, so it is not permanently gone, but it does not offset gains when you wanted it to.

RSU vesting happens automatically on a schedule you cannot postpone. If you plan to harvest a loss on company shares, check your vesting calendar first.

The Section 83(b) Election for RSAs

Because RSA holders own shares from the grant date, federal law lets them choose to be taxed immediately instead of waiting for vesting. The 83(b) election tells the IRS to treat the fair market value on the grant date as ordinary income now. You pay tax right away, even though the company could still take the shares back if you leave. In exchange, the grant-date value becomes your cost basis, and the capital gains holding period starts on the grant date.¹

The election is attractive when the grant-date value is low. Say a startup grants you shares worth $0.10 each and they are worth $50 when they vest three years later. With an 83(b), you paid ordinary income tax on $0.10 per share, and all $49.90 of per-share appreciation is taxed at long-term capital gains rates when you sell (assuming you hold at least a year from the grant date). Without the election, the full $50 per share is ordinary income at vesting.

The deadline is absolute. You must file a written statement with the IRS within 30 days of the grant date, with no extensions.¹ The election is irrevocable in any practical sense. A copy is attached to your tax return for the year of the grant, and another goes to your employer.

The risk is real. If you leave the company and forfeit the shares after making the election, no deduction is allowed for the ordinary income you already reported.¹ You may claim a capital loss limited to any cash you paid for the shares, but the income tax on the fair market value you recognized is gone. The 83(b) is a bet that the stock will appreciate enough to justify paying tax on shares you might not keep.

Fix Your Cost Basis Before You File

Cost basis errors are the most common filing mistake for employees with stock compensation, and they almost always cause overpayment. Your basis is whatever amount was already taxed as ordinary income. Ignore it, and you pay capital gains tax on money that was already taxed as wages.

RSUs, and RSAs without an 83(b) election: basis is the fair market value on the vesting date, which is the number that appeared on your W-2.
RSAs with an 83(b) election: basis is the fair market value on the grant date, plus any cash you paid for the shares.

When you sell, your brokerage reports the transaction on Form 1099-B.⁷ Brokerages frequently report the cost basis as $0 or another incorrect figure for stock compensation shares because they do not have your payroll records. If you accept that number, the IRS sees the entire sale price as a capital gain, even though most of it was already taxed as wages.

You correct this on Form 8949. Report the proceeds from the 1099-B, enter your correct basis, and put the difference in Column (g) as an adjustment.⁸ Totals flow to Schedule D, which splits short-term and long-term gains before they land on your 1040.⁹

Sell-to-cover shares from a vesting event also appear on a 1099-B. Because they were sold the same day they vested, the sale price and basis are nearly identical and the gain or loss is close to zero, but the transaction still has to be reported.

Compare your 1099-B to your W-2 every year you sell stock compensation shares. If the numbers do not reconcile, you almost certainly need a basis adjustment on Form 8949.

Extra Taxes That Hit High Earners

The 22% supplemental withholding rate makes an RSU tax bill look manageable. Several additional taxes it does not fully cover can change that.

Net Investment Income Tax

Capital gains from selling vested shares can trigger a 3.8% Net Investment Income Tax. NIIT applies to the lesser of your net investment income or the amount by which your modified adjusted gross income exceeds $200,000 (single), $250,000 (married filing jointly), or $125,000 (married filing separately).¹⁰ These thresholds are not indexed for inflation and have not changed since 2013. The wage portion of your RSU income is not investment income for NIIT purposes, but it raises your modified AGI, which can pull more of your gains into the surtax.

Additional Medicare Tax

A separate 0.9% Additional Medicare Tax applies to Medicare wages above $200,000 (single), $250,000 (married filing jointly), or $125,000 (married filing separately).¹¹ RSU vesting income is Medicare wages, so a large vest can push you past the threshold. Your employer withholds the extra 0.9% only once your wages from that employer exceed $200,000, regardless of filing status. If you are married filing jointly and combined wages stay under $250,000, over-withholding comes back as a credit. If both spouses earn wages, you may owe more than was withheld.

Social Security Wage Base

Social Security tax (6.2% for employees) applies only up to the annual wage base, which is $184,500 for 2026.¹² If your salary already exceeds that, RSU income adds no more Social Security tax. Medicare tax has no cap and applies to the full vesting amount.

What Happens If You Leave Before Vesting

Unvested RSUs are typically forfeited when you leave, whether you quit or are terminated. Because you never owned the shares and no income was recognized, there are no tax consequences. The units simply disappear from your equity account.

Unvested RSAs work the same way if you did not file an 83(b): the company reclaims the shares, and you owe nothing because no income was recognized. If you did file an 83(b), you already paid tax on the grant-date value and get no deduction for the forfeiture. Some grant agreements accelerate vesting on acquisition, disability, or retirement, but that is a matter of your specific agreement rather than the tax code.

A Special Break for Some Startup Employees

Employees at early-stage C corporations who receive RSAs may qualify for the Section 1202 exclusion on Qualified Small Business Stock. If the company’s gross assets do not exceed $75 million (for stock issued after July 4, 2025) and the business operates in an eligible industry, gain from selling QSBS can be partially or fully excluded from federal tax. The exclusion is 50% for shares held at least three years, 75% for at least four years, and 100% for five years or more, capped at the greater of $15 million or ten times your adjusted basis in the stock.

The 83(b) election matters here because it starts the QSBS holding period on the grant date rather than the vesting date. For a founder or early employee at a company that takes five to seven years to reach an exit, that head start can be the difference between the full exclusion and falling short. Professional services, banking, farming, hospitality, and certain other industries are excluded, and the rules run deep enough that it is worth confirming with a tax professional before counting on the break.

1
Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection With Performance of Services
2
Internal Revenue Service. Publication 15 – Employer’s Tax Guide – Section: 7. Supplemental Wages
3
Internal Revenue Service. Topic No. 306, Penalty for Underpayment of Estimated Tax
4
Internal Revenue Service. Topic No. 409 – Capital Gains and Losses
5
Tax Foundation. 2026 Tax Brackets and Federal Income Tax Rates
6
Office of the Law Revision Counsel. 26 USC 1091 – Loss From Wash Sales of Stock or Securities
7
Internal Revenue Service. About Form 1099-B, Proceeds From Broker and Barter Exchange Transactions
8
Internal Revenue Service. About Form 8949, Sales and Other Dispositions of Capital Assets
9
Internal Revenue Service. About Schedule D (Form 1040), Capital Gains and Losses
10
Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax
11
Internal Revenue Service. Topic No. 560, Additional Medicare Tax
12
Social Security Administration. Contribution and Benefit Base