Restricted Stock Unit (RSU)

Detailed Explanation

RSUs are a contractual promise from an employer to deliver shares (or cash equivalent) when vesting conditions are met, typically a time-based schedule (e.g., 25% per year for 4 years), a performance milestone, or a liquidity event for private-company double-trigger RSUs. The grant itself is not taxable. At vesting, the FMV of the delivered shares is ordinary compensation income, reported in Box 1 of the W-2 with federal income, Social Security, and Medicare taxes withheld. Public-company employers commonly withhold at the 22% supplemental rate (37% for amounts over $1 million in a single year), which is often below the actual marginal rate for high earners, leading to a balance due at filing. The vesting-date FMV becomes the cost basis. Subsequent sale creates a short-term capital gain/loss if held one year or less from vesting, or long-term if held longer. Many companies offer a "sell-to-cover" arrangement where some shares are automatically sold at vesting to cover the withholding, with the remaining shares delivered to the employee. RSUs differ from Restricted Stock (which has rights at grant, eligible for 83(b) election to lock in low FMV) and from stock options (which require exercise). Tax planning around RSUs includes: making quarterly estimated payments to cover under-withholding, diversifying out of concentrated company stock, considering tax-loss harvesting on positions that have declined since vesting, and timing sales to fall in years with lower marginal rates or capital gains brackets.