How RSUs are taxed
Restricted stock units are taxed at two separate moments.
1. When they vest. The market value of the shares on the vest date is ordinary wage income. Your employer adds it to your W-2 (many also list it in box 14) and withholds tax, usually by selling some shares ("sell-to-cover"). The value taxed here becomes your cost basis in the shares.
2. When you sell. Only the change in value since the vest date is a capital gain or loss. Hold the shares more than one year after vesting and any gain is long-term, taxed at lower rates. Each vest is its own lot with its own basis and holding period.
So the shares are never "free": you paid for them with taxed wages, and that payment is your basis.
Why the double count happens
Your broker reports the sale on Form 1099-B, but often with the wrong basis. You paid no cash for RSU shares, so many brokers report a basis of $0 or mark it "not reported." IRS broker-reporting rules since 2014 also stop brokers from adding compensation income into the basis they report for many employee stock awards.
Tax software takes the 1099-B at face value. Unless you correct it, the whole sale price looks like profit, even though most of it was already taxed on your W-2.
Most equity-plan brokers also publish a supplemental statement with the correct, adjusted basis for each lot. It often arrives separately from the 1099-B, so look for it in your account's tax documents.
A worked example
Priya has 400 RSUs vest when her company's stock is $150. That's $60,000 of wages on her W-2. Her employer sells 140 shares at vest to cover withholding. Eight months later she sells the other 260 shares at $170.
| Sale | Proceeds | Basis on 1099-B | Gain as reported | Correct basis | Correct gain |
|---|---|---|---|---|---|
| 140 sell-to-cover shares at $150 | $21,000 | $0 | $21,000 | $21,000 | $0 |
| 260 shares at $170 | $44,200 | $0 | $44,200 | $39,000 | $5,200 short-term |
| Total | $65,200 | $0 | $65,200 | $60,000 | $5,200 |
Filed as reported, Priya's capital gains are overstated by exactly $60,000, the income already on her W-2. At a combined 35% federal and 9.3% California marginal rate, that's roughly $26,000 of tax she doesn't owe.
How to fix it on your return
You don't need a corrected 1099-B. You report the sale as the broker did, then adjust the basis on Form 8949.
- Find the true basis. Use your broker's supplemental statement, or multiply shares sold by the vest-date price from your vest confirmation.
- Match each sale to its vest. Each vest date is a separate lot; partial sales use that lot's per-share basis.
- Report on Form 8949. If the 1099-B shows a basis, enter it as shown, put code B in column (f) and the adjustment in column (g) so the gain reflects the correct basis. If basis wasn't reported to the IRS, enter the correct basis in column (e).
- Check the result. Sell-to-cover sales should show a gain or loss near $0. Totals flow to Schedule D.
- Look back. If a prior year's return used the $0 basis, an amended return (Form 1040-X) can recover the overpayment, generally within three years of filing.
Tax software can do this, but only when you tell it the sale was employee stock and enter the adjusted basis. Many people miss that screen.
Other RSU traps to watch
Underwithholding. Employers usually withhold federal tax on vested RSUs at a flat 22% (37% on supplemental wages above $1 million a year). If your top bracket is 32% or 35%, that flat rate falls short, and the gap shows up as a balance due in April, sometimes with an underpayment penalty. California withholds 10.23% on bonuses and stock pay, which is closer but can still miss. A mid-year projection and an extra estimated payment usually solve it.
Moving states. California taxes RSU income by the share of your workdays in California between grant and vest, even after you move away. A 2021 California tax appeals decision confirmed this workday method. If you moved during a vesting period, expect a nonresident California return and check for credits in your new state.
Wash sales. Selling shares at a loss within 30 days before or after a new vest (or an ESPP purchase) can disallow part of that loss. Check vest dates before selling at a loss.
Holding periods. The clock starts at each vest, not at grant. Holding more than a year turns gains long-term, but concentration in one company's stock has its own risk; weigh both, not just the tax.
Checklist: what to gather
- Form W-2 (check box 1 and any RSU amount in box 14)
- Form 1099-B from your equity-plan broker
- The broker's supplemental or adjusted cost basis statement
- Vest confirmations or a vesting history report (date, shares, price, shares withheld)
- Records of where you lived and worked during each vesting period, if you moved
- Last year's return, to check for a $0 basis you can still amend
Want a second set of eyes?
LongCourse Tax prepares returns for people with RSUs, ESPPs and stock options, and reconciles every lot before filing. If you'd like me to review your documents or prepare this year's return, book a short intro call.
This guide is general information, not tax advice for your situation. Rules and rates change; figures reflect the 2026 tax year. David Langhals, CFP® professional; passed all three parts of the IRS Special Enrollment Examination, enrollment pending.
Reviewed for the 2026 tax year · Updated November 8, 2026