Restricted Stock Units (RSUs) are a type of equity compensation that companies can offer as a way to retain you as an employee. It can be a very powerful form of compensation in your long-term planning, but it is important to understand how they work and how they are taxed.
Here are a few important terms that you should know:
Grant Date
The day your company gives you the RSUs. It is still restricted.
Vesting Schedule
The timeline for when your RSUs officially become yours. The date you can sell them.
Vested Shares
RSUs that are now fully yours and you can sell whenever you want.
Unvested Shares
RSUs you don't own yet, you're still waiting for them to vest.
Withholding
When your company automatically sells some shares to cover your taxes instead of you getting a surprise tax bill.
Ordinary Income
The taxes you owe the day your RSUs vest (treated like regular salary).
Capital Gains
The taxes you owe if the stock price goes up between vesting and when you sell.
How do RSUs work?
They are typically awarded by companies to employees that reach a milestone such as length of tenure with the company or position. This allows:
- Employees to have ownership in the company, including potential growth of your shares.
- Employees to have the same vision and goals as the company.
- The company to pay employees in other ways so that they can use the cash for other initiatives.
A common example:
You recently start a new position as Director of Software Engineering at your company. As a part of that new role, they give you an increase in salary and the following RSUs:
Grant Date: 7/1/2026
RSUs awarded: 400 shares
Vesting Period:
7/1/2027 = 100 shares
7/1/2028 = 100 shares
7/1/2029 = 100 shares
7/1/2030 = 100 shares
These dates are when they vest. On 7/1/2027, you will have 100 shares of your company stock that you can sell or hold on to for potential future growth. If your company stock is trading at $100 per share, that's an additional $10,000 of income that year.
How are RSUs taxed?
On grant date: there is no tax.
Day it vests: The amount that vests is taxed as ordinary income. In the same example above, the $10,000 will be taxed as ordinary income.
Sometimes companies will withhold shares to cover your taxes so that you aren't blinded by a large tax bill come tax deadline. It is important to make sure that you are aware of how your company does this or not to be prepared.
Short-Term Vs Long-Term Capital Gains Tax
You will be responsible for capital gains tax if you hold the shares beyond the vesting date and the price per share fluctuates. You will be taxed on either a short-term or long-term basis. Here's how that works:
- Short-term capital gain/loss: If you hold the stock for less than a year, then decide to sell.
- Long-term capital gain/loss: If you hold the stock for more than a year, then decide to sell.
Referring back to the example above, if you receive 100 shares at $100 per share, you receive $10,000 that is taxed as ordinary income. If you choose to hold the stock and it goes up to $110 per share, then you decide to sell, that's an additional $1,000 that you made and are now responsible for capital gains tax. Again, if it was less than a year = short-term. Longer than a year = Long-term.
Should I sell or hold on?
When your shares vest, you can either:
Sell - sell your shares and cash out or invest somewhere else, OR
Hold on - keep your shares and participate if the stock goes up or down. If you do nothing, you will hold by default.
Here are some situations where someone may choose to sell or hold:
- Hold - because you think the stock will go up.
- Hold - because you like the initiatives that your company is doing and thinks it will help the company.
- Sell - because you are nervous about the direction of the company.
- Sell - you need the cash for something else.
- Sell - you are concentrated heavily in your company stock and would like to diversify.
Ultimately, the decision to sell or hold largely comes down to your specific situation. When are you going to retire? What is your risk tolerance? What is your goal? What is your tax situation?
The Financial Result
When you understand your Restricted Stock Units (RSUs), they can play a decisive role in your long-term financial planning. If you are using them to plan intentionally, they can give you a large advantage on your path to retirement.