How sell-to-cover works at vest
When RSUs vest, the vest-day value is wage income. Your employer must withhold tax on it, and with sell-to-cover the plan administrator sells enough of the new shares to pay that withholding. You keep the rest.
The withholding covers everything required at vest: federal income tax (usually a flat 22%), state income tax where it applies, Social Security (until the $184,500 wage base) and Medicare.
Example: 400 shares vest at $125 ($50,000) for a California employee earning $180,000. Total withholding is $18,039: $11,000 federal, $5,115 California, and $1,924 Social Security, Medicare and SDI. That's about 145 shares sold, leaving about 255 in your account.
What sell-to-cover doesn't cover is the difference between the 22% federal rate and your actual bracket. If the vest falls in the 32% or 35% bracket, part of the tax is still unpaid.
Three ways to settle a vest
Sell-to-cover (most common): shares are sold for the withholding and you keep the rest. You keep your upside, but any remaining shortfall is yours to fund.
Same-day sale (sell all): every vested share is sold and you receive cash after withholding. There's no price risk and no capital gain, and you can set aside the shortfall from the cash. It's a good fit if you already hold a lot of your employer's stock.
Cash payment (where offered): you receive all the shares and pay the withholding from your own cash. It keeps every share, but needs cash on hand on vest day.
If you're unsure, a common approach is sell-to-cover plus selling the extra shares needed for the shortfall on vest day.
How many extra shares to sell
| Base salary | Federal gap | California gap | Total gap | Extra shares at $125 |
|---|---|---|---|---|
| $180,000 | −$1,970 | +$465 | −$1,505 | 13 |
| $250,000 | −$5,830 | +$465 | −$5,365 | 43 |
| $300,000 | −$6,500 | +$465 | −$6,035 | 49 |
California's required 10.23% withholding is slightly more than the 9.3% most tech salaries owe, so the state side is over-withheld by $465. The shortfall is federal. At $180,000 part of the vest is still in the 24% bracket; at $250,000 and above it's in the 32% and 35% brackets.
The formula: extra shares = total gap ÷ share price, rounded up. The calculator does this for you at your vest price.
When to sell
On vest day (lowest risk). The tax is fixed by the vest-day value. Selling the extra shares right away locks the amount you need. If the stock falls 15% before you sell, the same $1,505 needs 15 shares instead of 13, and larger gaps grow proportionally.
Later in the year. You keep more shares for longer, but you take the price risk, and you still need the money by the estimated tax deadline or when you file.
Pay from cash instead. If you'd rather keep the shares, set aside the calculated amount from savings on vest day or add it to your paycheck withholding.
Whichever you choose, decide on vest day, not in March.
How the sale is taxed
Two separate events happen. First, the vest: the vest-day value is wage income on your W-2, taxed whether or not you sell. Second, the sale: a capital gain or loss equal to the sale price minus your cost basis, which is the vest-day value.
Selling on vest day or shortly after usually creates a gain or loss of a few dollars at most. If you hold the shares, the holding period starts on the vest date. More than 12 months gives long-term capital gains rates (0%, 15% or 20%); 12 months or less is taxed as ordinary income. Single filers with modified AGI over $200,000 ($250,000 married filing jointly) may also owe the 3.8% net investment income tax on the gain. Most states tax capital gains as regular income.
Common mistakes
- Assuming sell-to-cover paid everything. It paid the required withholding, not your full tax.
- Double-counting the vest on your return. If your Form 1099-B shows a cost basis of $0 or blank, the sale looks like pure profit. Report the vest-day value as your basis on Form 8949.
- Waiting until April. The stock price can move and the underpayment penalty accrues.
- Creating an accidental wash sale. Selling shares at a loss within 30 days before or after another vest (or an ESPP purchase) of the same stock can disallow the loss.