Sell to Cover RSUs: Where a Third of Your Shares Just Went

When an RSU vests and settles, your employer has paid you compensation equal to the share value that day, and the tax system treats it exactly like a cash bonus: income tax withholding and payroll taxes are due through the payroll system immediately, not next April. But you were paid in stock, not cash, so the money to fund the withholding has to come from somewhere.

Sell-to-cover is the somewhere. At the moment of settlement, the plan broker sells enough shares at the market price to raise the required withholding, wires the proceeds to payroll, and deposits the remaining shares. The whole sequence is automatic; most employees only notice it when the deposited share count looks short. On your W-2, the vest value appears in Box 1 wages and the remitted amounts appear in the federal, state, Social Security, and Medicare withholding boxes, just as if cash salary had been withheld.

It is worth separating the two things that just happened, because they are taxed separately. First, a compensation event: vest value taxed as wages. Second, an investment event: a sale of a few hundred shares that you owned for a matter of moments. The compensation event is fully handled by the W-2. The sale is not; it generates a Form 1099-B and belongs on your return, which is where the trouble described in section five begins.

Every vest generates a release confirmation in your equity portal with three numbers: shares released, shares sold (or withheld) for taxes, and net shares issued. The middle number is the one that answers the "where did my shares go" question, and it is driven entirely by the withholding percentages your employer applies:

• Federal income tax: the flat supplemental rate, 22% for most employees, a mandatory 37% once cumulative supplemental wages pass $1 million in a year. Full detail on the RSU withholding guide.
• Social Security: 6.2% until your year-to-date wages reach the wage base ($184,500 for 2026), after which this piece drops away. Late-year vests for high earners often escape it.
• Medicare: 1.45% on everything, plus an extra 0.9% withheld once your wages pass $200,000 for the year.
• State and local: whatever your state requires on supplemental wages, from zero in Texas or Washington to roughly 10% or more for high earners in California.

Stack those and a typical mid-career employee in a taxing state loses 30% to 40% of each vest to withholding, which is why roughly a third of the shares routinely vanish. The broker also rounds up to whole shares, sells at a price that moves between vest and execution, and nets out a commission, so the arithmetic is rarely penny-perfect. Small residual cash from rounding usually lands in your brokerage account.

To run this math on your own numbers, vest by vest, use the RSU tax calculator. It estimates the withholding, the net shares, and, more importantly, the gap between what was withheld and what you will actually owe.

Plans differ in what they let you do at vest, but the menu is usually some subset of three choices. The wage income is identical under all of them; what changes is how much employer stock you are left holding and where the tax cash comes from.

A useful test cuts through the choice: if the vest had arrived as a cash bonus, would you buy your employer's stock with it today? Same-day sale is the honest answer for most people with concentrated employer exposure, and because basis equals vest-date value, selling everything at vest costs almost nothing in additional tax. Whichever route you choose, the reporting mechanics on your return are the same, and they are covered step by step on the RSU tax return guide.

In February, the broker sends a 1099-B for the covered sale: 347 shares, proceeds $13,880, and, very often, a cost basis of zero or blank. That is not a clerical error; broker reporting rules generally prevent them from including the compensation income in the reported basis for equity-comp shares. The IRS gets the same document.

If you (or your tax software, on autopilot) accept the zero basis, the return shows a $13,880 short-term gain on money that was already taxed as wages. On a 347-share covered sale that mistake costs a few thousand dollars; across years of vests and sales it compounds badly. The correction is a basis adjustment on Form 8949 (code B), entering the true vest-date basis of the shares sold. The complete walk-through, including what the columns should look like, is on the RSU cost basis guide.

The wash-sale rule disallows a loss on stock if you acquire substantially identical stock within 30 days before or after the loss sale, rolling the loss into the basis of the replacement shares instead. RSU holders trip this rule without trading at all, because a vest IS an acquisition. Two patterns to watch:

Pattern one: selling held shares at a loss near a vest date. You sell older RSU shares at a loss in March to harvest the loss, and a scheduled vest delivers new shares 12 days later. The vest is a replacement acquisition inside the 30-day window; the loss (to the extent of the replacement shares) is disallowed for now and moves into the new shares' basis. With monthly or quarterly vest schedules, there may be no calendar window at all in which a loss sale is clean.

Pattern two: the covered sale itself at a loss. If the price falls between the vest that set your basis and the execution of the sell-to-cover trade, the covered sale books a small loss, and the vest that preceded it by minutes is a replacement acquisition. The disallowed dollars are usually trivial, but broker systems flag it, and the "W" adjustment shows up on your 1099-B, confusing people every February.

Sell-to-cover creates a dangerous feeling of completeness: shares were sold, taxes were paid, somebody handled it. What was handled is the withholding requirement, and the federal piece of that is a flat 22% for most people. An employee whose salary plus vests puts them in the 35% bracket is 13 points short on every vested dollar. On $200,000 of annual vest income, that is roughly $26,000 of unfunded tax quietly accruing toward the filing deadline, sometimes with an estimated-tax penalty on top.

The diagnosis and the fix (safe-harbor targets, estimated payment timing, and asking payroll for extra withholding) are the whole subject of the RSU tax withholding guide. The one-sentence version: compare the flat rate being withheld on vests against your true marginal bracket, multiply the gap by the year's expected vest value, and either bank that amount or send it in quarterly.

If this year's vests are large, run the projection now rather than in April. The RSU tax calculator gives a fast estimate, and a planning conversation turns it into actual quarterly numbers alongside the rest of your return.