How to Avoid Double Taxation on RSUs (Restricted Stock Units)
With tax season in full swing, it’s the perfect time to highlight a costly — and surprisingly common — mistake made by employees of large public companies who receive Restricted Stock Units (RSUs) as part of their compensation.
Many individuals unknowingly pay taxes twice on their RSUs when they sell them. The fix is straightforward — but if you don’t know what to look for, you could overpay the IRS and never realize it.
Let’s break it down step-by-step so you can avoid this pitfall.
What Is a Restricted Stock Unit (RSU)?
A Restricted Stock Unit (RSU) is a form of equity compensation offered by employers. It represents a promise to deliver company stock (or cash equivalent) at a future date, once certain conditions are met.
These conditions are called vesting requirements.
Common Vesting Structures
Time-based vesting (most common) – Shares vest over a set period (e.g., 4 years)
Performance-based vesting – Based on company or individual performance
Liquidity events – Such as an IPO or acquisition
If you leave your employer before vesting, you typically forfeit any unvested shares.
How RSUs Are Taxed
Understanding RSU taxation is key to avoiding mistakes.
1. Taxed at Vesting (Ordinary Income)
When RSUs vest:
The value of the shares is taxed as ordinary income
This amount is reported on your W-2
Employers usually withhold taxes automatically via a “sell-to-cover” transaction
2. Taxed Again at Sale (Capital Gains)
After vesting:
Your cost basis = fair market value on the vesting date
Any future increase in value is taxed as:
Short-term capital gains (≤ 1 year)
Long-term capital gains (> 1 year)
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Example: How RSUs Work in Real Life
Let’s look at a simple example:
You receive 500 RSUs
Vesting schedule: 25% per year over 4 years
Year 1: 125 shares vest
Value at vesting: $30,000
At vesting:
$30,000 is added to your W-2 income
Taxes are withheld
Remaining shares are deposited into your brokerage account
Later:
Shares grow to $33,000
You sell them
👉 Your actual gain = $3,000, not $33,000
Where Double Taxation Happens
Here’s where things go wrong.
When you sell RSUs:
Your brokerage issues Form 1099-B
Many RSUs are classified as non-covered securities
This means the brokerage may not report your cost basis to the IRS
The Problem
If your cost basis is:
Missing or reported as $0
The IRS may assume:
You made a $33,000 gain instead of $3,000
That means:
You’re taxed again on the $30,000 already taxed at vesting
🚨 Result: Double taxation
How to Avoid Paying Taxes Twice on RSUs
Step 1: Verify Your Cost Basis
Before filing your taxes:
Contact your brokerage (Fidelity, Schwab, E*TRADE, Vanguard, etc.)
Confirm your cost basis reflects the vesting value
Step 2: Review Your 1099-B Carefully
At tax time:
Check if the cost basis is:
Missing
Incorrect
Reported as $0
If anything looks off, address it immediately.
What to Do If Your Cost Basis Is Wrong
If you’ve already sold your RSUs and notice an issue:
Option 1: Work With a CPA
Provide:
Vesting statements
Fair market value at vesting
They can correctly adjust your reporting.
Option 2: Fix It Yourself
If using tax software (e.g., TurboTax, H&R Block):
Use Form 8949
Manually adjust the cost basis
Include an explanation for the correction
💡 This step is critical to avoid overpaying taxes.
Key Takeaways
RSUs are taxed twice — but only once on the same dollars if reported correctly
Your cost basis = value at vesting
If your cost basis is missing, you risk double taxation
The IRS will not fix this for you — you must catch it
Final Thoughts
If you receive RSUs, it’s essential to “inspect what you expect.”
Between complex compensation structures, multiple income sources, and tax reporting nuances, it’s easy for costly mistakes to slip through.
Even if you work with a tax professional, don’t assume errors will be caught automatically — clear communication is key.
In many cases, working with a CPA or qualified tax professional during years when RSUs vest or are sold can help ensure everything is handled correctly.
Have a great week—and I’ll talk to you next Friday.
Written by Ryan Morrissey CFP®, CLU®, CHFC®, CMFC
Founder & Principal Advisor of Morrissey Wealth Management
Host of the Retire with Ryan Podcast