RSUs: why selling at vest is the sensible default

Restricted stock units are the most common form of equity compensation at public companies, and the most common question about them is what to do when they vest. For most people, in most situations, the evidence points to a simple default: sell at vest and diversify. Here is the reasoning, and the cases where it does not apply.

How RSUs are taxed

When RSUs vest, the market value of the shares is ordinary income in that year, exactly as if your employer had paid you a cash bonus. It appears on your W-2, and your employer typically withholds some shares to cover taxes. This is settled tax mechanics, described in IRS Publication 525.

The important consequence: holding the shares after vest gives you no tax benefit on the income you already recognized. Only the growth after the vest date gets capital-gains treatment. Tax-wise, a vested RSU is a share of employer stock you were just handed the cash to buy.

The bonus test

That framing produces the clarifying question: if your employer had paid the bonus in cash, would you use all of it to buy your company's stock? For most people the honest answer is no. They already have their salary, their unvested grants, and often their professional network tied to the same company. Holding vested shares adds more of the same exposure on top.

Single stocks are riskier than they feel. Bessembinder's study of the full history of US listed companies found that most individual stocks underperformed Treasury bills over their lifetimes; the market's long-run return came from a small minority of big winners. A diversified portfolio holds those winners by construction. A concentrated position is a bet on picking one of them, made with money you have already earned.

When selling at vest is not simple

• Trading windows and blackout periods. Employees with access to material nonpublic information can usually trade only in open windows. The practical answer is often a standing plan under SEC Rule 10b5-1 that sells on a schedule.
• Existing appreciated lots. Shares held from earlier vests carry their own gains; unwinding a large position is a staged, tax-aware project rather than a single order.
• Deliberate conviction positions. Choosing to hold employer stock can be reasonable when it is sized consciously, as a percentage of net worth you could afford to lose, rather than accumulated by default.

The default is not a law. It is the position that needs no special justification, while holding is the choice that should have one.