Restricted stock and restricted stock units look almost identical on an offer letter, but they are not the same instrument. Restricted stock is an actual share of company stock transferred to you on the grant date, subject to forfeiture until it vests. A restricted stock unit is a contractual promise to deliver a share later, once you have vested. That one difference — property now versus a promise for later — drives everything else that separates the two: how you are taxed, when you are taxed, whether you can lock in a low tax bill early, whether you vote as a shareholder, and how dividends reach you.
What You Actually Receive on the Grant Date
With restricted stock, shares are issued in your name the day the grant is made. You are a shareholder from day one. The company keeps a right to reacquire the shares if you leave before vesting, but under federal tax law the shares are treated as property transferred to you in connection with services.1Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection With Performance of Services
An RSU is different in kind. Nothing is issued at grant. Your employer simply commits to deliver a share (or its cash equivalent) once the vesting conditions are met.2Internal Revenue Service. Equity (Stock) Based Compensation Audit Technique Guide Until delivery, you own nothing. You are closer to a general creditor of the company than to a shareholder.
If you are unsure which one you hold, check your grant agreement before anything else. The tax and rights implications flow directly from that label.
How Each One Is Taxed
Without any special election, both instruments produce the same result: ordinary income tax at vesting, on the full fair market value of the shares as of that date, minus anything you paid for them.1Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection With Performance of Services Most grants cost the employee nothing, so the entire vesting-date value hits your W-2 as wages.
If 200 RSUs vest when the stock is at $75, you have $15,000 of ordinary income that year. Your employer withholds federal income tax, Social Security tax (6.2% up to the 2026 wage base of $184,500), Medicare tax (1.45%), and state tax where applicable.3Social Security Administration. Contribution and Benefit Base Once your Medicare wages cross $200,000 in a year, an additional 0.9% Medicare tax applies to the excess.4Internal Revenue Service. Topic No. 560 – Additional Medicare Tax
Federal withholding on equity compensation typically uses the 22% flat supplemental wage rate.5Internal Revenue Service. 2026 Publication 15-T – Federal Income Tax Withholding Methods If your actual marginal rate is 32% or higher, that flat withholding can leave you badly under-withheld after a large vesting event. Set aside cash or make estimated payments to close the gap.
Employers usually cover the tax through sell-to-cover, where enough newly vested shares are sold on the open market to fund the withholding, or through net settlement, where the company withholds shares internally. Either way, you end up with fewer shares than the gross vesting number.
The 83(b) Election: The Real Advantage of Restricted Stock
Because restricted stock is property, Section 83(b) lets you elect to pay ordinary income tax on its value at grant instead of at vesting.1Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection With Performance of Services At an early-stage startup where shares are worth fractions of a penny, the resulting tax bill can be trivial. Every dollar of future appreciation is then treated as capital gain when you sell, and your long-term holding period starts at grant rather than at vesting.
The deadline is unforgiving. You must file within 30 days of the grant date. There are no extensions, and the IRS will not waive the deadline for any reason. The IRS provides Form 15620 for the election; you sign it, mail it to the IRS office where you file your return, and give a copy to your employer.6Internal Revenue Service. Instructions for Form 15620 – Section 83(b) Election Send it certified so you have a postmark.
The election is a bet. If you leave before the shares vest and forfeit them, the tax you paid is gone; the statute explicitly denies a deduction for the forfeiture.1Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection With Performance of Services If the stock drops below your election value, you have overpaid with no way to recover the difference until sale. The election makes sense when the grant-date value is low, the upside is meaningful, and you expect to stay through vesting. At a public company issuing restricted stock already worth $80 a share, the math looks very different from an early startup.
Why RSU Holders Cannot Make This Election
Section 83(b) requires a transfer of property. An RSU is a promise, not property. Nothing changes hands at grant, so there is nothing to elect on. RSU holders always pay ordinary income tax at vesting. That inability to lock in an early low value is the single biggest tax disadvantage of RSUs compared to restricted stock.
Voting Rights and Dividends During Vesting
Restricted stock holders are generally treated as shareholders while the shares are vesting. In most plans that means voting rights on corporate matters, even on unvested shares, though the specifics depend on the plan documents and the company’s articles of incorporation.
RSU holders have no shareholder rights before delivery. No vote, no proxy materials, no standing at shareholder meetings.
The same distinction shapes how dividends work. Restricted stock holders receive dividends alongside other shareholders. During the vesting period, absent an 83(b) election, those dividends are taxed as ordinary compensation rather than as qualified dividends, because the underlying shares are still substantially non-vested property. After vesting, or with an 83(b) election in place, normal dividend tax treatment applies.
RSU holders receive no actual dividends because they own no shares. Many plans credit “dividend equivalents” that accumulate during vesting and pay out in cash or additional shares when the RSUs settle. Those payments are taxed as ordinary wage income when paid, which keeps things simple during the vesting period.
What Happens When You Leave
The default rule is the same for both instruments: anything unvested is forfeited when employment ends, whether you resign, are laid off, or are terminated for cause. Most plan documents draw no distinction between the reasons for departure. Once you are no longer employed, the vesting clock stops.
Shares that have already vested belong to you outright. Vested RSUs that have been settled into shares sit in your brokerage account like any other stock. Vested restricted stock is yours free of the company’s reacquisition right.
Exceptions exist, but they come from your specific plan or a negotiated severance agreement, not from the tax code. Some plans accelerate vesting on death or disability. Change-of-control provisions may accelerate vesting in whole or in part. Read the grant agreement before assuming anything other than forfeiture.
Forfeiture is especially harsh for restricted stock holders who made an 83(b) election. You paid tax on the grant-date value of shares you no longer own, and the law provides no deduction or refund for that loss.1Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection With Performance of Services
Selling Your Vested Shares
Once shares have vested and sit in your brokerage account, they behave like any other stock you own. The ordinary income you already recognized (at vesting, or at grant if you made an 83(b) election) becomes your cost basis. When you sell, capital gains tax applies only to the difference between your sale price and that basis.
Holding period rules determine the rate. Sell within a year of vesting and the gain is short-term, taxed at ordinary rates. Hold longer than a year and you qualify for long-term capital gains rates, which top out at 20% for high earners.7Internal Revenue Service. Topic No. 409 – Capital Gains and Losses With an 83(b) election on restricted stock, the holding period runs from the grant date, which can put you in long-term territory much sooner.
The 1099-B Cost Basis Trap
This one catches people every filing season. When you sell vested shares, your broker issues a Form 1099-B reporting the sale proceeds. Under current IRS rules, brokerages cannot report the full adjusted cost basis for shares acquired through equity compensation. The cost basis box often shows $0 or is left blank.
If you enter that number as-is, you will pay tax on the full sale price, even though you already paid ordinary income tax on the vesting-date value. Use the supplemental statement your broker provides to calculate the correct adjusted basis on Form 8949. Skipping this adjustment means paying tax twice on the same income.
Wash Sales Around RSU Vesting
If you sell company stock at a loss within 30 days before or after an RSU vesting event, the IRS treats the vesting as an acquisition of substantially identical securities. That triggers the wash sale rule and disallows the loss for the current year. The disallowed loss is added to the basis of the newly vested shares, so it is not gone forever, but you cannot claim it when you planned to. Employees on quarterly or monthly vesting cadences are the most exposed. If you plan to harvest a loss, check the vesting calendar and keep the sale more than 30 days from any vesting date.
Where You Encounter Each Type
Most employees do not choose between the two; the employer chooses. Public companies overwhelmingly grant RSUs because they are simpler to administer, create no tax at grant, and avoid the risk of employees missing an 83(b) deadline. Restricted stock appears most often at early-stage startups, where a near-zero share value makes an 83(b) election an obvious move for anyone who plans to stay through vesting.
The RSU Wrinkle at Private Companies
RSUs have become the dominant equity vehicle at late-stage private companies, but they work differently there because no public market exists to fund tax withholding. Most private-company RSUs use “double-trigger” vesting: you need both the time-based vest and a liquidity event, usually an IPO or acquisition, before shares are delivered.
Under this structure you can complete four years of service and still hold nothing if no liquidity event has occurred. If the company never goes public or gets acquired before the award expires, the RSUs expire worthless. The upside is that you owe no tax until both triggers are met and real, sellable shares appear in your account. You avoid the worst outcome in equity compensation: a large tax bill on illiquid stock you cannot sell.
How to Think About the Choice
On the rare occasion you do have a choice, the decision turns on two questions: how confident are you that the stock will appreciate, and how confident are you that you will stay long enough to vest. Strong confidence on both favors restricted stock with an 83(b) election, because you convert future appreciation from ordinary income into long-term capital gain and start the holding clock immediately. Meaningful doubt on either count tilts toward RSUs, where you owe nothing until shares with real value land in your account. The worst outcome in equity compensation is paying tax on something you never get to keep, and the 83(b) election is the only path that leads there.