When your restricted stock’s restrictions lapse, the fair market value of the newly unrestricted shares is treated as ordinary wage income in that year, added to your W-2, and hit with federal income tax, Social Security, and Medicare withholding all at once. That is true whether you sell a single share or not. A restricted stock lapse is simply the moment the substantial risk of forfeiture on your shares disappears and you own them outright, and under Section 83 of the Internal Revenue Code, that moment is the taxable event.1Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection With Performance of Services What you do next with the cost basis determines whether you end up paying tax on the same money twice.
What “Lapse” Actually Means
Restricted stock comes in two forms. Restricted Stock Awards (RSAs) put actual shares in your name on the grant date, but those shares are locked down until you satisfy vesting conditions. Restricted Stock Units (RSUs) aren’t shares at all until vesting; they’re a promise to deliver shares later. Both carry a substantial risk of forfeiture: leave the company or miss a performance target and unvested shares disappear.
The lapse is the moment that risk of forfeiture ends. For RSAs, the restrictions on shares you already held are lifted. For RSUs, this is when the shares are actually delivered to your brokerage account for the first time. The lapse is automatic once your vesting condition is met, and no action from you is required. If the vesting math produces a fractional share, most plans pay out the fraction in cash at fair market value rather than issuing a partial share.
The Tax Bill Triggered at Lapse
Federal tax law requires you to include the fair market value of the shares (minus anything you paid for them) in gross income in the year the restriction lapses.1Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection With Performance of Services The IRS treats it as compensation, not investment income. Your employer adds it to your W-2, and it’s subject to the full stack of employment taxes: federal income tax, Social Security at 6.2% on earnings up to the 2026 wage base of $184,500, and Medicare at 1.45%.2Social Security Administration. 2026 Cost-of-Living Adjustment (COLA) Fact Sheet
If your total wages for the year exceed $200,000 (single) or $250,000 (married filing jointly), an additional 0.9% Medicare tax applies to earnings above those thresholds.3Internal Revenue Service. Questions and Answers for the Additional Medicare Tax A sizable vesting event can push you past that line even if your base salary alone wouldn’t.
The math is straightforward. Multiply the number of shares that vested by the stock’s closing price on the vesting date. If 200 shares vest when the stock is trading at $75, you have $15,000 of new ordinary income. That $15,000 shows up on your W-2 next to your salary, and you owe income tax on the combined total.4Internal Revenue Service. Publication 525 – Taxable and Nontaxable Income
Why the Withholding Is Usually Too Low
Because the vesting income counts as supplemental wages, your employer withholds federal income tax at a flat 22%. If your total supplemental wages for the year exceed $1 million, the excess is withheld at 37%.5Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide
Companies handle the withholding one of two ways. In net share settlement (the most common), the company holds back a portion of your vesting shares and covers the tax bill internally, delivering only the remaining shares to your account. Under sell-to-cover, all shares vest into your account and the broker immediately sells enough of them on the open market to generate the tax cash, leaving you the rest plus any small residual.
Here is the trap most first-timers walk into: 22% federal withholding is almost certainly not enough if you’re in a higher bracket. A software engineer earning $180,000 in salary whose $60,000 in RSUs vest on top is likely at a 32% marginal federal rate or higher on that $60,000. Withholding at 22% leaves roughly a ten-point gap you’ll owe when you file. States that withhold on supplemental wages at their own flat rates may fall short in the same way. Set aside extra cash, or make estimated tax payments, so the shortfall doesn’t ambush you in April.
Your Cost Basis and the Double-Tax Trap
The fair market value included on your W-2 becomes your cost basis in the shares.4Internal Revenue Service. Publication 525 – Taxable and Nontaxable Income In the earlier example, if 200 shares vested at $75, your basis is $75 per share. That’s the amount you’ve already paid ordinary income tax on, and it’s the starting point for calculating gain or loss when you sell.
This is where the most expensive mistake happens. When your broker issues Form 1099-B after you sell, the reported cost basis is frequently wrong. Many brokers report $0, or they report only what you paid out of pocket (usually nothing for RSUs), ignoring the income you already recognized on your W-2. Drop that 1099-B into your return unchanged and the IRS sees the entire sale proceeds as taxable gain, even though you already paid income tax on the fair market value at vesting. You get taxed twice on the same money.
Fix this on Form 8949 by manually adjusting the cost basis to reflect the full amount already included in your W-2 income.6Internal Revenue Service. Instructions for Form 8949 Your plan administrator’s supplemental statement usually shows the correct adjusted basis even when the 1099-B doesn’t. Getting this wrong is the single most common error people make with restricted stock, and it can cost thousands in overpaid tax.
Selling After the Lapse
Once the restrictions have lapsed and you own the shares outright, any further price movement is a capital gain or loss measured from your cost basis. Sell a $75-basis share for $95 and you have a $20 capital gain; sell it for $60 and you have a $15 capital loss.7Internal Revenue Service. Topic No. 409, Capital Gains and Losses
The holding period for capital gains purposes starts on the lapse date, not the original grant date. That controls your rate:7Internal Revenue Service. Topic No. 409, Capital Gains and Losses
- Held one year or less from the lapse: short-term gains taxed at ordinary income rates, up to 37%.
- Held more than one year from the lapse: long-term gains taxed at 0%, 15%, or 20% depending on your taxable income.
High earners should also weigh the 3.8% net investment income tax, which applies to capital gains when modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly).8Internal Revenue Service. Topic No. 559, Net Investment Income Tax Stacked on the 20% long-term rate, that puts the top effective federal rate on long-term gains at 23.8%. Report the sales on Form 8949 and carry the totals to Schedule D of your Form 1040.6Internal Revenue Service. Instructions for Form 8949
Wash Sales Can Wipe Out a Harvested Loss
If you sell vested shares at a loss and additional restricted shares vest within 30 days before or after that sale, the IRS may treat the new vesting as a “purchase” of substantially identical stock. Under the wash sale rule, your loss deduction is disallowed for the number of shares replaced, and the disallowed loss is added to the basis of the replacement shares instead.9Office of the Law Revision Counsel. 26 USC 1091 – Loss From Wash Sales of Stock or Securities
This catches people because they didn’t actively buy anything. Vesting happened automatically on a schedule they set years ago. The tax code doesn’t care about intent. If you’re planning to harvest a loss on company stock, check your vesting calendar first: a vesting event anywhere in the 61-day window around your sale can strip the deduction. The loss isn’t permanently gone (it rolls into the basis of the newly vested shares), but you lose the benefit of taking it now.
If You Leave Before the Restrictions Lapse
Resign, get laid off, or get terminated before your shares vest and you typically forfeit all unvested shares. The restrictions never lapse, so no taxable event happens and you owe nothing on shares you never received. Under the default tax treatment, there’s no tax consequence at all, because you never recognized income on those shares in the first place.
Some plans have accelerated vesting for retirement, disability, death, or a change of control such as an acquisition, and some go the other way with clawback provisions for termination for cause. What you keep on the way out depends entirely on your grant agreement and plan documents. Read them before assuming.
Restrictions That Can Outlive the Tax Lapse
The tax restrictions lapsing doesn’t automatically mean you can sell tomorrow. Two separate barriers can hold you up.
SEC Rule 144 for Affiliates
If you’re an officer, director, or large shareholder (an “affiliate” under securities law), SEC Rule 144 limits how much stock you can sell and when. Affiliate sales in any three-month period can’t exceed the greater of 1% of the outstanding shares or the average weekly trading volume over the prior four weeks, and you generally need to file a Form 144 notice with the SEC. If you’re not an affiliate and the company has been filing SEC reports for at least 90 days, these volume limits don’t apply to you once the six-month holding period has passed.10eCFR. 17 CFR 230.144 – Persons Deemed Not to Be Engaged in a Distribution and Therefore Not Underwriters
Company Blackout Periods
Most public companies impose their own trading restrictions through insider trading policies, prohibiting employees from buying or selling company stock during blackout periods around earnings announcements and other major events. Even if your shares vested yesterday and you want to diversify immediately, you may have to wait for an open trading window. Violating a company blackout can bring disciplinary action, disgorgement of profits, or securities law liability. Clear any sale with your company’s legal or compliance team first.
One boundary worth flagging: if you hold RSAs rather than RSUs and want to be taxed at grant instead of at lapse, that’s a separate Section 83(b) election with its own 30-day filing deadline and its own tradeoffs.11Internal Revenue Service. Form 15620 Instructions, Section 83(b) Election Everything above assumes the default treatment, where the taxable event is the lapse itself.