How RSUs Are Taxed: A Guide for H1B and GC Holders
By WealthyDesis Team · August 6, 2026
If you’re an H1B or green card holder at a company that pays part of your compensation in restricted stock units, one rule matters more than any other: ordinary income tax is owed on the full value of your shares the moment they vest, not when they’re granted and not when you sell them. That single fact drives almost every planning decision downstream, from how much lands in your paycheck to the size of the tax bill waiting for you the following April.
What actually happens at grant, vest, and sale
An RSU grant is a promise, not a payment. When your offer letter reads “4,000 RSUs vesting over 4 years,” you don’t own anything yet — no taxable event, nothing to report. The grant date matters only for setting the vesting schedule.
Vesting is what actually triggers the tax. Most tech companies run a four-year schedule with either a one-year cliff (25% vests on your first anniversary, then monthly or quarterly after) or quarterly vesting from day one. On each vesting date, the fair market value of the shares that vest that day gets added to your W-2 as ordinary wages, treated exactly like a cash bonus even though you received stock instead of cash.
Sale is a second, separate tax event. Once shares vest, your cost basis is set at that day’s fair market value, since that value has already been taxed as income. Sell immediately and there’s usually little or no additional gain. Hold, and any appreciation since vesting gets taxed as a capital gain — short-term at ordinary rates if sold within a year of vesting, long-term (0%/15%/20% depending on income) if held longer.
Worked example: a $150,000 salary with a $60,000 vest
Say you’re an H1B employee at a mid-size tech company earning a $150,000 base salary. Your grant vests 1,000 shares this quarter, and the stock trades at $60 on the vesting date.
- Taxable ordinary income added: 1,000 shares × $60 = $60,000
- New total W-2 wages for the year (assuming this is your only vest): $150,000 + $60,000 = $210,000
- Cost basis per share going forward: $60 (the vest-date FMV)
That $60,000 isn’t some lightly-taxed windfall sitting off to the side — it stacks directly on top of your salary and gets taxed at your marginal rate for that income level, same as if your employer had simply handed you a $60,000 check. If the stock hits $75 six months later and you sell, you’d report a short-term capital gain of ($75 − $60) × 1,000 = $15,000, taxed at your ordinary rate because you held less than a year from vest.
Why your paycheck withholding won’t match this bill
Employers generally withhold RSU income at the IRS’s flat supplemental-wage rate: 22% federal on amounts up to $1 million in supplemental wages for the year, jumping to 37% above that (IRS Publication 15, Section 7). Social Security tax (6.2% up to the annual wage base) and Medicare (1.45%, plus an additional 0.9% above $200,000 single) apply on top of that.
Here’s the catch: 22% is a withholding convenience, not your actual tax rate. If your combined salary-plus-vest income pushes you into the 32% or 35% federal bracket, the 22% withheld on your RSU income falls well short of what you’ll actually owe — a gap that usually only surfaces at tax filing, sometimes with an underpayment penalty attached. This mismatch shows up often enough at RSU-heavy employers that it gets its own article; see “Why Your RSU Tax Withholding Falls Short” for the mechanics of closing that gap before it becomes a surprise bill.
The immigration-specific wrinkle
For a U.S. citizen colleague with the identical grant, RSU income is just income. For an H1B holder, the same shares carry a layer of risk a citizen doesn’t have: your ability to keep vesting depends on your employer continuing to sponsor your status. A layoff doesn’t just end your paycheck — unvested RSUs are typically forfeited immediately (with no tax consequence on the forfeited shares, since you never paid tax on them), and you’re simultaneously racing USCIS’s 60-day grace period to secure a new sponsor, change status, or leave the country. Vested shares, by contrast, are yours no matter what happens to your visa afterward, one more reason not to treat “vested but unsold” RSUs as untouchable.
What happens if this is mismanaged
- Underpaying quarterly estimated taxes: if your 22%-withheld RSU income pushes your effective rate above what was withheld, the IRS can charge an underpayment penalty even if you pay in full by April 15 — the penalty is calculated on the shortfall during the year, not just the year-end balance.
- Assuming grant date matters for taxes: some employees track their grant date thinking it starts a capital-gains clock — it doesn’t. Only the vest date starts your holding period and sets your cost basis.
- Treating vest-date FMV as sale price: if you don’t sell immediately, brokers sometimes report an incomplete cost basis on Form 1099-B at sale, causing you to accidentally pay income tax and capital gains tax on the same value unless you correct the basis on Form 8949.
- Letting concentration build silently: each vest adds another slice of a single employer’s stock to your net worth on top of your paycheck and, for H1B holders, your visa — a risk that compounds quietly if you never sell.
- Missing the layoff timing: not knowing that unvested RSUs are typically forfeited the moment employment ends can mean losing a grant you were 30 days from vesting, with no recourse once you’re off payroll.
Sources: IRS Publication 525 (Taxable and Nontaxable Income); IRS Publication 15 (Circular E), Section 7, Supplemental Wages.
Frequently asked questions
Do I pay tax on RSUs when they're granted or when they vest?
Neither grant nor sale — ordinary income tax is owed the moment shares vest, based on that day's fair market value. Selling later triggers a second, separate tax event on any gain or loss since vesting.
Can I file an 83(b) election on RSUs to lower my tax bill?
No. An 83(b) election only applies to restricted stock you actually receive and could forfeit, like early-exercised options. RSUs don't transfer any property at grant, so there's nothing to elect against.
Does my H1B status affect how RSUs are taxed?
The tax mechanics work identically to a U.S. citizen's. What's different is the risk profile: your equity, your paycheck, and your visa sponsorship all run through the same employer, which changes how much of a concentrated position makes sense to hold.
What happens to the tax I already paid if my RSUs vest and then the stock drops before I sell?
You still owe ordinary income tax based on the value at vest — that bill doesn't shrink just because the stock falls afterward. If you sell at a lower price, you can claim a capital loss on the difference between your vest-date cost basis and your sale price, but that loss offsets other gains rather than refunding the income tax you already paid.
Written by WealthyDesis Team
Reviewed for accuracy against current IRS and USCIS guidance at time of publishing.
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