The RSU Tax Trap: What Tech Employees Get Wrong Every Year

Key Takeaways

• RSUs are taxed as ordinary income when they vest, not when you sell them
• Many tech employees owe $50K+ in unexpected taxes because they didn't plan for vesting events
• Holding vested RSUs concentrates your risk in one company, your employer, which already pays your salary
• A diversification plan should start the day your RSUs vest, not when you "feel ready"
• Selling RSUs at vest is not pessimistic about your company. It's smart risk management.

---

Why Do RSUs Catch People Off Guard?

Restricted stock units are the most common form of equity compensation in tech. Google, Meta, Amazon, Microsoft, and basically every major tech company uses them. And yet, every single year, thousands of tech workers are shocked by their tax bill.

Here's why. When your RSUs vest, the IRS treats that as ordinary income. Not capital gains. Ordinary income. That means it's taxed at your marginal income tax rate, which for most tech workers in high-cost cities is 32% to 37% federally, plus state taxes.

So if $200,000 worth of RSUs vest in a single year, you could owe $74,000 to $90,000 in taxes on that alone. And that's on top of the taxes on your regular salary.

Most companies withhold taxes on RSU vesting, but they typically withhold at the supplemental income rate of 22% federally. That's way less than what most tech workers actually owe. According to Fidelity's 2025 Stock Plan Services report, 62% of tech employees with RSUs underpay their estimated taxes, leading to surprise bills in April.

The Concentration Problem Nobody Talks About

Here's the thing that really gets me. I talk to tech employees all the time who have $500K, $1M, even $2M+ in their company's stock. And that same company is also paying their salary, funding their health insurance, and contributing to their 401(k).

That's not diversification. That's putting everything on one number at the roulette table.

I get it. You believe in your company. You think the stock is going higher. And maybe it will. But Enron employees believed in their company too. So did employees at WeWork, Peloton, and dozens of other companies that looked unstoppable until they weren't.

A study published in the Journal of Financial Planning found that employees who hold more than 10% of their net worth in employer stock have significantly higher portfolio volatility and worse risk-adjusted returns over 10-year periods compared to those who diversify.

You don't have to sell everything. But you got to be smart about how concentrated you are.

What Should You Actually Do With Vested RSUs?

There are really three approaches, and which one makes sense depends on your situation.

Sell at vest and diversify. This is the simplest approach. The day your RSUs vest, you sell them and invest the after-tax proceeds into a diversified portfolio. You've already been "paid" in company stock through the vesting. Selling is just converting that payment into something more balanced.

Sell a percentage and hold the rest. If you genuinely believe your company's stock has more upside, keep some. But set a rule. Maybe you sell 50% at vest and hold 50%. Or you keep no more than 15% of your total portfolio in company stock. Having a rule prevents emotional decision-making.

Hold everything and hope. I'm not going to tell you this never works. Sometimes it does. But realistically, the data says it's a losing strategy for most people over time. The SEC has published multiple investor bulletins warning about the risks of concentrated stock positions, and for good reason.

The Tax Planning Part

Beyond just the vesting taxes, there are some real planning opportunities most people miss.

Tax-loss harvesting. If your other investments have losses, you can sell those to offset gains from RSU sales. This can reduce your overall tax bill significantly.

Charitable giving. If you're charitably inclined, donating appreciated RSU shares to a donor-advised fund lets you deduct the full market value and avoid paying capital gains entirely. This works especially well in years where you have a large vesting event.

Timing your sales. If you have flexibility on when you sell (and your company's trading window allows it), spreading sales across two calendar years can keep you in a lower tax bracket. The difference between the 32% and 35% federal bracket in 2026 is about $40,000 in income. That's not nothing.

Maximize your 401(k) and HSA. This sounds basic, but in years with large RSU vests, maxing out your pre-tax contributions is even more important. The 2026 401(k) limit is $23,500 ($31,000 if you're over 50), and every dollar you contribute reduces your taxable income dollar for dollar.

What About ISOs vs. RSUs?

If you're at an earlier-stage company, you might have incentive stock options (ISOs) instead of RSUs. The tax treatment is completely different. ISOs aren't taxed at exercise (though they can trigger AMT), and if you hold the shares for at least one year after exercise and two years after grant, you get long-term capital gains treatment.

The key difference is that RSUs are basically guaranteed money (as long as your company's stock has value), while ISOs require you to pay to exercise and take on the risk that the stock could go down.

If you have ISOs, the 83(b) election and early exercise strategies I've written about before become really important. But that's a whole separate topic.

The Bottom Line

RSUs are a great benefit. They've created real wealth for a lot of people in tech. But they come with tax complexity and concentration risk that most people don't plan for until it's too late.

The simple version: know your vesting schedule, plan for the taxes, have a diversification rule, and stick to it. Selling your RSUs isn't being disloyal to your company. It's being smart about your own financial future.

Because realistically, your company isn't going to plan your finances for you. That's your job. And the best time to start is before the next vest date hits.

Summary

RSUs are taxed as ordinary income at vesting, typically at rates much higher than the default withholding. This leads to surprise tax bills for thousands of tech workers every year. Beyond taxes, holding too much company stock creates dangerous concentration risk. The smart move is to have a clear plan for selling, diversifying, and tax-optimizing your RSUs before each vesting event, not after.