RSUs and Equity Comp

Receiving Restricted Stock Units (RSUs) is one of the most exciting ways to build wealth as an employee, but it also creates immense confusion come tax season.

How RSUs Are Taxed

Unlike stock options, RSUs are taxed as ordinary income the moment they vest. Your company will usually withhold a portion of the shares (often at a flat supplemental rate) to cover these taxes. The remaining shares are deposited into your brokerage account, and they are yours to keep or sell.

The Golden Rule of RSUs

Because they are taxed immediately upon vesting, you should treat RSUs exactly like a cash bonus. Ask yourself this question: "If my company handed me a cash bonus today instead of these shares, would I use that cash to go buy my company's stock?"

If the answer is no, you should strongly consider selling your RSUs as soon as they vest to diversify your portfolio. Keeping too much of your net worth tied up in the same company that pays your salary is incredibly risky.

Capital Gains

If you choose to hold the stock after it vests, any future growth (or loss) from that vesting price will be subject to capital gains taxes when you eventually sell. Selling immediately upon vesting usually results in little to no capital gains tax.