A stock award is company shares — or the contractual right to receive shares later — that your employer grants you as part of your pay. Instead of landing in your paycheck as cash, the compensation is delivered in equity that you earn over time by staying with the company and, sometimes, hitting performance targets. What makes stock awards different from a bonus is timing: you generally don’t own the shares outright on day one, and the tax bill arrives in two separate stages that can be years apart.
The point of the delay is retention. Tying part of your pay to the share price gives you a reason to stay and a stake in how the company performs. That is why equity compensation is common at technology companies, startups, and publicly traded firms competing for talent.
The Two Main Types: RSUs and RSAs
Almost every stock award falls into one of two structures, and the difference matters for how and when you’re taxed.
Restricted Stock Units
A Restricted Stock Unit (RSU) is a promise to deliver shares in the future if you meet the vesting conditions. On the grant date you own nothing — no voting rights, no dividends (though some plans credit “dividend equivalents” that pay out later). The shares arrive in your brokerage account only when the RSU vests and settles, and that is also the moment the IRS treats them as income. RSUs are the dominant form of equity compensation at large public companies because they are simpler for the employee and hold value as long as the share price is above zero.
Restricted Stock Awards
A Restricted Stock Award (RSA) is an actual transfer of shares on the grant date. You are a legal shareholder from day one, with voting rights and dividends, even on unvested shares. The catch: the company keeps a repurchase right, so if you leave before vesting you forfeit the unvested shares, usually for what you paid (often nothing). RSAs show up more at startups and pre-IPO companies where shares carry a very low fair market value, and that low value opens up the 83(b) planning move covered below.
How Vesting Works
Vesting is the process of earning full ownership of the shares. Your grant agreement sets the schedule, and the clock starts on the grant date.
The most common arrangement is four years with a one-year cliff. Nothing vests during your first year. On your one-year anniversary, 25% of the grant vests at once. The remaining 75% then vests in smaller monthly or quarterly increments over the next three years. Other companies skip the cliff and use graded vesting, releasing equal installments from the start.
Some grants add performance conditions: shares only vest if the company hits revenue, earnings, or stock-price targets. Time and performance conditions can also be stacked, requiring both continued employment and a hit target.
When shares vest, the mechanics differ by award type. For RSUs, the company transfers shares into your brokerage account, delivering on its promise. For RSAs, the company simply lifts its repurchase right and any transfer restrictions on shares you already hold. Either way, the shares are yours to hold or sell.
How Stock Awards Are Taxed
A stock award creates two separate taxable events: one at vesting, one at sale. Understanding both is what keeps you from paying tax twice on the same money.
Tax at Vesting
Under Section 83 of the Internal Revenue Code, when property transferred for services is no longer subject to a substantial risk of forfeiture, its fair market value (minus anything you paid) is ordinary income in that year.1Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection With Performance of Services For a stock award, that is the number of vesting shares multiplied by the closing price on the vesting date.
This amount appears on your W-2, just like salary. It is subject to federal income tax, Social Security tax (6.2% up to the annual wage base), Medicare tax (1.45%, plus the 0.9% Additional Medicare Tax on earnings above $200,000), and any applicable state and local income taxes.2National Association of Stock Plan Professionals. Year-End Tax Reporting Questions Answered – Equity Compensation
The fair market value at vesting also becomes your cost basis in the shares — the starting point for figuring capital gain or loss when you eventually sell.
Tax at Sale
When you sell, the difference between your sale price and your cost basis is a capital gain or loss, reported on Form 8949 and carried to Schedule D of your Form 1040.3Internal Revenue Service. Instructions for Form 8949 The rate depends on how long you held the shares after vesting:
- One year or less: short-term capital gain, taxed at your ordinary income rate.
- More than one year: long-term capital gain, taxed at 0%, 15%, or 20% depending on your taxable income.4Internal Revenue Service. Topic No. 409, Capital Gains and Losses
For 2026, the 0% long-term rate applies to taxable income up to $49,450 for single filers ($98,900 for married filing jointly). The 15% rate covers income above those amounts up to $545,500 for single filers ($613,700 for joint filers). Above those thresholds, the 20% rate applies. If your modified adjusted gross income exceeds $200,000 as a single filer or $250,000 filing jointly, the 3.8% Net Investment Income Tax may also apply.5Internal Revenue Service. Net Investment Income Tax
Sell for less than your basis and you have a capital loss. Losses offset gains dollar for dollar, and up to $3,000 of net loss per year can offset ordinary income, with the rest carrying forward.
How Your Employer Handles Withholding
Your employer must withhold income and payroll taxes when shares vest. Stock awards are supplemental wages, so federal income tax is typically withheld at a flat 22%. If your total supplemental wages for the year exceed $1 million, the rate on the excess is 37%.6Internal Revenue Service. Publication 15-A (2026), Employers Supplemental Tax Guide
Companies generally use one of three methods to collect that tax:
- Net share settlement. The company holds back a portion of your vesting shares, keeps them, and pays the tax from its own cash. You receive fewer shares and don’t need to come up with money. This is the most common method at large public companies.
- Sell-to-cover. The company or its broker sells just enough of your vesting shares on the open market to cover the tax, then deposits the rest in your account.
- Cash payment. You keep all the shares but pay the withholding out of pocket.
The flat 22% rate is often lower than the actual marginal rate that applies once a large vesting event is added to your other income. Many employees end up owing additional tax at filing. Running a projection in any year with significant vesting can prevent a surprise in April.
The Cost Basis Trap on Form 1099-B
When you sell shares from a stock award, your broker issues Form 1099-B reporting the proceeds and, ideally, the cost basis.7Internal Revenue Service. About Form 8949, Sales and Other Dispositions of Capital Assets The problem: brokers often report the basis as zero or leave it blank for RSU shares, because the shares were delivered rather than purchased through the brokerage.
Copy that zero onto your return and the IRS sees a capital gain equal to the entire sale price, even though you already paid ordinary income tax on the fair market value at vesting. You end up taxed twice on the same dollars. The fix is Form 8949: report the correct adjusted basis, which is the fair market value on the vesting date (the amount that appeared on your W-2). The 1099-B will often carry a code in Box 12 indicating that basis was not reported to the IRS, which is your signal to make the adjustment.8Internal Revenue Service. Instructions for Form 1099-B
Keep your vesting confirmations. They are the documents that prove your actual basis if the IRS questions the difference.
The 83(b) Election for Restricted Stock Awards
If you receive an RSA, you have a tax move that RSU holders do not: the Section 83(b) election. It lets you recognize the ordinary income tax event on the grant date instead of at vesting.1Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection With Performance of Services If the shares carry a low fair market value at grant (common at early-stage startups), you pay ordinary income tax on that small amount now. All later appreciation is then eligible for long-term capital gains treatment, as long as you hold the shares for more than a year after the grant date.
The math can be dramatic. If a startup grants shares worth $0.10 each and they are worth $50 four years later at vesting, the 83(b) election means ordinary income tax was paid on $0.10 per share instead of $50. The $49.90 of appreciation per share is taxed at the lower long-term capital gains rate when sold.
The downside is symmetric. File the election, leave before vesting, and you forfeit the shares with no refund on the tax you already paid. The statute bars any deduction for forfeited property when an 83(b) election was made.
The deadline is strict. You must file the election with the IRS within 30 days of the grant date using Form 15620.9Internal Revenue Service. Form 15620 – Section 83(b) Election Miss the window and the election is gone for that grant. The 83(b) election is not available for RSUs, because an RSU is a promise of future shares rather than a current transfer of property.
What Happens If You Leave the Company
Unvested shares are almost always forfeited when you leave, whether you quit, are laid off, or are fired. The standard grant agreement language is blunt: unvested shares are immediately and automatically forfeited for no consideration upon termination.
Some agreements carve out exceptions. Termination without cause, or resignation for “good reason” (a significant pay cut, forced relocation, or major demotion), may trigger pro-rata vesting of a portion of unvested shares. Death and disability provisions vary. Termination for cause is the harshest case, and some agreements forfeit both vested and unvested shares.
Shares that have already vested are yours. Settled RSU shares in your brokerage account stay with you regardless of your employment status, and vested RSA shares with restrictions lifted work the same way. Anything you have already paid tax on at vesting is not clawed back.
Before accepting a new job or handing in notice, add up the value of unvested shares you would leave behind. Recruiters at the new company may offer a sign-on grant or cash to offset the loss, but usually only if you bring it up.