What Is An RSU?

Equity Compensation Tax Planning Updated April 2026

What Is An RSU?
Restricted Stock Units Explained

Everything tech professionals need to know about how RSUs work, how they're taxed, and how to build a plan before your first shares vest.

22%
Default federal withholding, often too low
1-4 yrs
Typical RSU vesting schedule length
12 mo
Holding period for long-term capital gains

A restricted stock unit (RSU) is a form of equity compensation in which an employer promises to grant an employee a set number of company shares upon meeting specific vesting conditions. RSUs are taxed as ordinary income at the time of vesting, based on the stock's fair market value on that date. Unlike stock options, RSUs retain value even if the stock price drops after the grant date.

In This Guide
What Is an RSU and How Does It Work? How Are RSUs Taxed? How Do RSUs Differ from Stock Options? How to Maximize the Value of Your RSUs The Pros and Cons of RSUs Frequently Asked Questions
The Basics

What Is an RSU and How Does It Work?

An RSU is a company's promise to deliver shares of its stock to an employee at a future date, contingent on satisfying a vesting schedule. At grant, the employee receives no shares and owes no taxes. Once the vesting conditions are met, the shares are delivered and their value is recognized as ordinary income.

RSUs are typically administered through platforms such as Fidelity Stock Plan Services, E*Trade, or Schwab Equity Award Center. Cliff vesting and graded vesting are the two most common structures: cliff vesting releases all shares at once after a set period, while graded vesting releases shares incrementally, for example 25% per year over four years.

RSUs vs. Options

How Do RSUs Differ from Stock Options?

RSUs and stock options are both forms of equity compensation, but they work differently in three key ways: cost, risk, and tax treatment. With RSUs, the employee pays nothing upfront and receives shares at vesting regardless of stock price movement. With ISOs or NSOs, the employee must pay an exercise price, and if the stock falls below that price, the options can become worthless.

RSUsISOs / NSOs
Upfront costNoneExercise price required
Value if stock dropsRetain value at vestingCan become worthless
Tax at grantNoneNone
Tax at vesting/exerciseOrdinary income on FMVOrdinary income (NSOs) or AMT rules (ISOs)
Tax when soldShort- or long-term cap gainsShort- or long-term cap gains
Typical vesting1-4 years, graded or cliff1-4 years, graded or cliff

For most employees at large public companies, RSUs are the more common grant type. Stock options, particularly ISOs, are more prevalent at early-stage startups where the exercise price may be low relative to anticipated future value.

Advantages & Drawbacks

The Pros and Cons of RSUs

Advantages
Guaranteed value at vestingRSUs convert to shares regardless of market movement, unlike options that can expire worthless.
No upfront capital requiredNo check to write. A meaningful difference from exercising ISOs or NSOs, which can cost tens of thousands.
Aligned with company performanceDirect ownership ties your financial outcome to the company's long-term trajectory.
Drawbacks
Taxes triggered whether you're ready or notOrdinary income plus FICA owed at vesting. Employer withholding is often a flat 22%, not enough for high earners in CA or NY.
Long vesting creates golden handcuffsA 4-year schedule with a 1-year cliff means zero shares for your first 12 months. Leave early and you forfeit the grant entirely.
Tax Treatment

How Are RSUs Taxed?

RSUs are taxed at two distinct points in their lifecycle: at vesting and at sale. There is no tax at grant.

📋
At Grant
No tax owed
An RSU grant is a promise, not a taxable event. You receive no shares and owe nothing.
📈
At Vesting
Ordinary income on full fair market value
The FMV of shares on the vesting date is recognized as ordinary income. Your employer withholds federal, state, and local taxes plus FICA, typically via sell-to-cover. The flat federal supplemental withholding rate is 22% (37% for income above $1M), but for high earners in CA or NY, your actual marginal rate is often higher. This gap creates surprise tax bills.
💰
At Sale
Capital gains on appreciation above cost basis
When you sell, the difference between your sale price and your cost basis (the FMV at vesting) is taxed as a capital gain. Hold shares more than 12 months after vesting for long-term rates (typically 15-20%); sell within 12 months and it's taxed as ordinary income.
⚡ High-Earner Watch-Out

For tech professionals with large RSU grants, the interaction between vesting income and your MAGI can affect eligibility for certain deductions and trigger the 3.8% net investment income tax at higher income levels. Modeling these scenarios before shares vest, not after, is where real tax savings happen.

Strategy

How to Maximize the Value of Your RSUs

Maximizing RSU value requires a plan that addresses taxes, concentration risk, and timing, ideally before your first vest date.

  • 1
    Understand your full vesting schedule. Know your grant date, cliff date, and graded milestones. Map them to your tax calendar so vesting events don't catch you off guard.
  • 2
    Model your tax liability before each vest. The default employer withholding rate often falls short of your actual marginal rate. Estimating your liability in advance and making estimated tax payments if needed can prevent underpayment penalties.
  • 3
    Address concentration risk proactively. Develop a systematic plan to diversify vested shares, potentially using a 10b5-1 plan if you're an insider, as a core component of equity compensation planning.
  • 4
    Track your cost basis carefully. Your cost basis is the FMV on the vesting date, reported on your W-2. Brokerage platforms may report adjusted or unadjusted cost basis, so verify this to avoid double-taxation when you file.
Common Questions

Frequently Asked Questions

Are RSUs taxed when granted or when vested?
RSUs are taxed at vesting, not at grant. The fair market value on the vesting date is treated as ordinary income and is subject to federal, state, and local income taxes, plus Social Security and Medicare taxes.
What happens to my RSUs if I leave my job before they vest?
Unvested RSUs are typically forfeited when you leave an employer. Some companies include accelerated vesting provisions for layoffs or acquisitions, but in most cases, only vested shares are yours to keep upon departure.
What is the difference between cliff vesting and graded vesting?
Cliff vesting releases all RSU shares at once after a defined period, for example 100% after one year. Graded vesting releases shares incrementally, for example 25% per year over four years. Graded vesting is the most common structure at large public tech companies.
Do I owe taxes if my RSUs go down in value after vesting?
Yes. Tax is owed on the fair market value at the time of vesting, regardless of what happens to the stock price afterward. If the stock declines and you sell at a loss, you may be able to claim a capital loss, but the ordinary income recognized at vesting cannot be reversed.
How does selling RSU shares affect my taxes?
When you sell RSU shares, any gain above your cost basis (the FMV at vesting) is taxed as a capital gain. Shares held more than twelve months after the vest date qualify for long-term capital gains rates. Shares sold within twelve months are taxed at ordinary income rates.
Work with Brooklyn Fi

Questions About Your RSU Strategy?

RSU taxation becomes significantly more complex as your income and grant size increase, especially in high-tax states or during a company IPO or acquisition. Brooklyn Fi's fee-only fiduciary advisors specialize in RSU and stock option planning for tech professionals. We help you model vesting scenarios, minimize tax drag, and build a diversification strategy before your shares vest.

Schedule a free discovery call →
Related reading: RSU Tax Withholding Rate: The No-Nonsense Guide  ·  Common RSU Misconceptions  ·  Sell to Cover RSU: Tax Strategies & Tips
AJ Ayers