Shares are vested when you’ve earned a non-forfeitable right to them, and released (sometimes called settled) when the actual stock lands in your brokerage account where you can sell it. For most Restricted Stock Units, vesting and release happen on the same day, which is why the terms get used interchangeably. They aren’t the same thing. The gap between them, when a gap exists, controls when you owe tax, how much your employer withholds, what cost basis you use when you sell, and when your holding period clock starts running. Understanding the difference between shares vested vs released keeps you from paying tax twice on the same income or missing a deadline that can’t be undone.
What Each Term Actually Means
Vesting is the moment you satisfy whatever conditions your employer attached to the award. Usually that’s staying employed through a time-based schedule, such as 25% per year over four years, or hitting a performance target. Once you vest, the company can’t take the shares back if you leave. You own the right to them.
Release, or settlement, is when the shares actually appear in your account and become yours to sell. For standard RSUs, your employer processes the vest, withholds taxes, and deposits the net shares all on the same day. That’s why most employees never notice the two are legally separate events.
When Vesting and Release Split Apart
The distinction stops being academic in two situations.
The first is a deferral program. Some companies let you vest in RSUs on one date but postpone delivery to a later date, such as retirement or a specified future year. Under federal tax law, income from property received for services is recognized when the property is no longer subject to a substantial risk of forfeiture and is transferable to you.1Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection With Performance of Services If you can’t actually access the shares because of a deferral, the release date, not the vesting date, is your taxable event.
Deferral programs fall under Section 409A of the tax code. Distribution can only happen on a permitted trigger: separation from service, a fixed date, a change in ownership, disability, death, or an unforeseeable emergency. You generally must make the deferral election before the start of the calendar year in which the RSUs would otherwise vest. If the arrangement fails to comply, the deferred compensation becomes immediately taxable and the IRS adds a 20% penalty tax plus interest calculated from the year the compensation was first deferred.2Office of the Law Revision Counsel. 26 USC 409A – Inclusion in Gross Income of Deferred Compensation Under Nonqualified Deferred Compensation Plans
The second situation is Restricted Stock, which is different from RSUs. With Restricted Stock, you receive actual shares on the grant date, but they sit in your account subject to forfeiture until vesting. When the vesting date arrives and the forfeiture risk drops away, that’s your tax recognition event. The shares were technically in your account earlier, but you didn’t fully own them.
Which Date Triggers Tax for Your Award
The right date depends on what you hold.
RSUs
Tax hits at vesting and release, which for standard RSUs is the same moment. The taxable amount equals the number of shares released multiplied by the fair market value on that date, and it’s treated as ordinary compensation income subject to federal income tax, state income tax, and payroll taxes. There’s no tax at grant.1Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection With Performance of Services
Non-Qualified Stock Options
NQSOs aren’t taxed at grant or at vesting. The taxable event is exercise. The amount you recognize is the spread between the fair market value on the exercise date and the exercise price you paid.3Internal Revenue Service. Topic No. 427, Stock Options For options, then, “vested” only means you’ve earned the right to exercise; the tax event is a separate action you have to take.
Incentive Stock Options
ISOs don’t trigger ordinary income tax at exercise if you meet two holding periods: more than one year after exercise and more than two years after grant. Meet both and the entire gain when you sell is taxed at long-term capital gains rates.4Office of the Law Revision Counsel. 26 USC 422 – Incentive Stock Options The spread at exercise is still an Alternative Minimum Tax adjustment in the exercise year, so you can owe AMT without selling anything.3Internal Revenue Service. Topic No. 427, Stock Options
What Gets Withheld at Release
When RSUs vest and release, or when you exercise NQSOs, your employer must withhold federal income tax, state income tax, Social Security, and Medicare on the compensation income, the same way it does on a paycheck. The mechanics of how the employer collects that withholding depend on your plan.
The most common method is sell-to-cover. The employer’s broker sells enough of the vesting shares on the open market to cover the tax bill and delivers the rest to you. If 100 shares vest and 35 are sold for taxes, you end up with 65.
Net share withholding does the same thing without a market sale: the employer simply holds back a portion of the shares and never delivers them. Some plans let you write a check to cover taxes instead, letting you keep every share, but that takes significant cash on hand.
Federal withholding on equity is treated as supplemental wages. The flat federal supplemental rate is 22% for the first $1 million in supplemental wages during the year and 37% above that. That 22% is a withholding estimate, not your actual tax rate. If your marginal rate is higher, you’ll owe more at filing time. The 37% rate can produce an overpayment that comes back as a refund.
Social Security tax at 6.2% applies until your total wages reach the wage base, which is $184,500 for 2026.5Social Security Administration. Contribution and Benefit Base Medicare at 1.45% has no cap. An Additional Medicare Tax of 0.9% applies once your wages exceed $200,000, and your employer must withhold it at that threshold regardless of your filing status.6Internal Revenue Service. Topic No. 560, Additional Medicare Tax
The Cost Basis Trap When You Sell
The ordinary income from your equity compensation appears on your W-2 in Box 1, combined with your salary. The full fair market value at vesting is included, not the net after withholding. Some employers break it out in Box 14 for reference, but that’s informational.7Fidelity Investments. Filing Taxes for Your Restricted Stock, Restricted Stock Units, or Performance Awards
When you eventually sell the shares, your brokerage issues Form 1099-B reporting proceeds and cost basis. This is where the most expensive mistake happens. Brokers are frequently required to report a cost basis of $0, or only what you personally paid, which for RSUs is nothing. If you enter the 1099-B basis without adjusting it, the IRS sees a gain equal to the full sale price, and you pay tax again on the same fair market value you already reported as compensation on your W-2. Double taxation on the same income.
The fix is Form 8949. Your true cost basis for released shares is the fair market value on the release date, which should match the compensation income on your W-2. Form 8949 has a column for correcting basis reported by brokers.8Internal Revenue Service. Instructions for Form 8949 Most brokers include the adjusted cost basis in the supplemental information alongside the 1099-B, even when they can’t put it in the official box. If you’ve filed prior returns with the wrong basis, you can amend the last three years using Form 1040-X to recover what you overpaid.
The Holding Period Starts at Release
Once shares are in your account and withholding is settled, the compensation phase is done. From that point on, you’re an investor, and any price movement produces a capital gain or loss measured from the fair market value at release.
The holding period for short-term versus long-term treatment starts the day after release, not the grant date and not the date vesting was originally scheduled. Sell within a year of release and the gain is short-term, taxed at your ordinary income rate. Hold more than a year after release and the gain qualifies for long-term capital gains rates.9Internal Revenue Service. Topic No. 409, Capital Gains and Losses
When shares vest in tranches over several years, each tranche has its own release date and its own clock. Track them separately. Confusing one tranche’s holding period with another’s is how people accidentally report short-term gains as long-term or the other way around.
If the stock drops below the release-date value, selling produces a capital loss. Capital losses offset capital gains dollar for dollar, and any remaining net loss can offset up to $3,000 of ordinary income per year, with the rest carried forward.
If You Leave Before Vesting
Unvested equity isn’t yours. Resign, get laid off, or get terminated before the vesting date and unvested RSUs and options are almost always forfeited. Only what has already vested survives your departure.
For vested stock options, most plans give a limited post-termination exercise window, typically around three months. Miss it and even fully vested options expire permanently. Check your equity agreement for the exact window before giving notice, especially if exercising will require significant cash or generate a large tax bill.
Some plans include acceleration clauses that vest a portion of unvested shares on specific triggers, most commonly a change-of-control event such as an acquisition, sometimes paired with a termination requirement (a double trigger). These provisions vary widely, so read the plan document rather than assuming.