Why do rsus get taxed twice

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Last updated: April 8, 2026

Quick Answer: RSUs (Restricted Stock Units) are taxed twice because they're taxed when they vest (as ordinary income based on the stock's fair market value) and again when you sell the shares (as capital gains on any appreciation). For example, if you receive 100 RSUs vesting at $50 per share, you pay income tax on $5,000 at vesting; if you later sell at $70 per share, you pay capital gains tax on the $2,000 gain. This double taxation occurs under U.S. tax rules, with vesting taxes typically withheld by employers at rates like 22% for federal supplemental income.

Key Facts

RSUs are taxed as ordinary income upon vesting based on the stock's fair market value at that time
Upon selling vested RSU shares, any appreciation is taxed as capital gains (short-term if held less than one year, long-term if held longer)
Employers typically withhold taxes at vesting at a flat 22% federal rate for supplemental wages (or 37% for amounts over $1 million)
The first tax event occurs when RSUs vest and shares are delivered, not when granted
Double taxation can be mitigated by holding shares long-term to qualify for lower capital gains rates (e.g., 0%, 15%, or 20% depending on income)

Overview

Restricted Stock Units (RSUs) are a form of equity compensation used by companies, particularly in the technology sector, to attract and retain employees. Introduced in the early 2000s as an alternative to stock options, RSUs grant employees the right to receive company shares after meeting vesting conditions, typically based on continued employment over 3-4 years. Unlike stock options, RSUs have value even if the stock price declines, making them less risky for employees. According to the National Center for Employee Ownership, over 50% of Fortune 500 companies used RSUs in 2023. The tax treatment of RSUs is governed by U.S. Internal Revenue Code Section 83, established in 1969, which dictates that property transferred in connection with services is taxable upon vesting. This framework creates the potential for double taxation, as shares are taxed both when they vest and when sold.

How It Works

The double taxation of RSUs occurs through two distinct tax events under U.S. law. First, when RSUs vest (e.g., after a 4-year schedule with 25% vesting annually), the fair market value of the shares at vesting date is treated as ordinary income. Employers report this on Form W-2 and typically withhold taxes at a flat 22% federal rate (or 37% for amounts over $1 million) plus applicable state and FICA taxes. For example, if 100 RSUs vest at $50 per share, $5,000 is added to the employee's taxable income. Second, when the employee sells the shares, any gain or loss from the sale is subject to capital gains tax. If sold immediately, the basis equals the vesting value, so no capital gain occurs; if held and sold later at a higher price, the appreciation is taxed at short-term (ordinary income rates) or long-term capital gains rates (0%, 15%, or 20% depending on income) if held over one year. This process effectively taxes the same economic value twice: once as income and again as investment gain.

Why It Matters

The double taxation of RSUs significantly impacts employee compensation and financial planning, especially in industries like tech where RSUs can constitute 30-50% of total pay. Employees must strategize around tax timing, such as holding shares for over a year to qualify for lower long-term capital gains rates, which can reduce the overall tax burden by 10-20 percentage points compared to short-term rates. For companies, understanding this tax structure is crucial for designing competitive packages; a 2022 survey by PwC found that 68% of employees consider tax implications when evaluating equity offers. The issue also highlights broader debates about equity compensation fairness, with some advocates arguing for tax code reforms to avoid double taxation on earned income. Proper management of RSUs can affect retirement savings and wealth accumulation, making financial literacy essential for recipients.