If you work at a Seattle-area tech company and hold restricted stock units, Washington's new tax landscape changes your planning calculus significantly. Between the capital gains tax that took effect in 2025 and the income tax arriving in 2028, RSU holders face a layered set of state tax obligations that didn't exist a few years ago.
In 60 seconds:
- RSU vesting is taxed as ordinary income federally, and Washington adds state income tax on vesting above $1,000,000 starting in 2028 (6.5% from $250,000 to $1,000,000; 9.9% above $1,000,000).
- Appreciation after vest is generally capital gain, with Washington’s capital gains tax kicking in above $250,000 (7%).
- This creates “double exposure” for many RSU holders: tax at vesting + tax on later gains, and less ability to control timing than stock options.
- Planning levers are mainly timing and withholding: managing vesting/sales, cash for tax payments, and using more flexible equity (when available).
This guide breaks down how Washington's taxes apply to RSUs, where the traps are, and what you can do about it.
How RSUs Are Taxed: The Federal Baseline
RSUs are straightforward at a high level: you receive a grant of units that vest over time (typically four years). When they vest, the fair market value of the shares is taxed as ordinary income. This is true whether you work at a public company or a private one.
If you hold the shares after vesting and later sell them at a higher price, the appreciation is taxed as a capital gain — long-term if you held more than a year after vesting, short-term (taxed as ordinary income) if you didn't.
Here's what that looks like at the federal level:
- At vesting: Fair market value = ordinary income. Subject to federal income tax (up to 37%), Social Security (6.2% up to the wage base), and Medicare (1.45%, plus 0.9% additional Medicare tax above $200,000).
- At sale (if held after vesting): Any appreciation above the vesting-date FMV = capital gain. Long-term capital gains rate: 0%, 15%, or 20% depending on income, plus the 3.8% net investment income tax for higher earners.
For most Seattle tech employees earning well into six figures, you're looking at the top brackets on both sides.
Washington's Capital Gains Tax and RSUs
Washington's capital gains tax, which took effect January 1, 2025, applies to long-term capital gains above $250,000. The rates are tiered:
- First $250,000 of long-term capital gains: exempt
- $250,001 to $1,000,000: 7%
- Above $1,000,000: 9.9%
How this hits RSU holders: If you hold your shares after vesting and sell them at a gain, the appreciation from the vesting date to the sale date is a capital gain. If those gains exceed $250,000 in a year, Washington's capital gains tax applies.
This is most relevant for employees at high-growth companies. If your RSUs vested at $50 per share and you sell at $200 per share years later, you could easily clear the $250,000 threshold on a meaningful position.
Important: The capital gains tax does not apply to the ordinary income recognized at vesting. It only applies to appreciation after vesting, and only if you hold the shares long enough for the gain to be long-term.
For more on Washington's capital gains tax, see my comprehensive guide to Washington's new income tax.
Washington's New Income Tax and RSUs
Governor Ferguson signed ESSB 6346 on March 30, 2026, creating Washington's first broad-based income tax. It takes effect January 1, 2028. Here's what it means for RSU holders:
- A $1 million standard deduction applies — so only income above $1 million is taxed.
- The rate is 9.9% on income above $1 million.
- The tax applies to all income — wages, ordinary income from RSU vesting, short-term capital gains, and other sources.
For RSU holders, this matters because RSU vesting is ordinary income. If you're a senior engineer or executive at a major tech company and your salary plus RSU vesting income pushes you above $1 million in a given year, Washington will now take 9.9% of the excess.
Consider this scenario: You earn $400,000 in base salary and $800,000 in RSU vesting income in 2028. Your total income is $1.2 million. Washington's income tax applies to the $200,000 above the $1 million threshold, costing you an additional $19,800 in state tax.
For employees at companies like Amazon, Microsoft, Google, or Meta with substantial RSU packages, crossing the $1 million threshold in a strong vesting year is not unusual.
For more detail on the income tax itself, see my post on Governor Ferguson signing Washington's income tax into law.
The Combined Tax Burden: A Worked Example
Let's walk through a realistic scenario for a senior tech employee in Seattle in 2028.
Facts:
- Base salary: $350,000
- RSU vesting income: $900,000 (shares vest at FMV throughout the year)
- Total ordinary income: $1,250,000
- After vesting, you hold shares for 18 months and sell, realizing $400,000 in long-term capital gains
Federal taxes on ordinary income:
- Federal income tax (37% top bracket): approximately $390,000
- Social Security + Medicare: approximately $25,000
- Net investment income tax on capital gains: $15,200
Federal taxes on capital gains:
- Long-term capital gains (20%): $80,000
Washington taxes:
- Income tax: 9.9% x ($1,250,000 - $1,000,000) = $24,750
- Capital gains tax: 7% x ($400,000 - $250,000) = $10,500
Total Washington state tax: $35,250
That's $35,250 in state taxes that wouldn't have existed before 2025. And this is a moderate scenario — employees with larger grants or at companies with rapid stock appreciation will pay substantially more.
The Private Company RSU Problem Gets Worse
I've written before about the fundamental problem with RSUs at private startups: when your RSUs vest, you owe ordinary income tax on the fair market value, but you can't sell the shares to pay the tax. You're taxed on paper wealth you can't access.
Washington's new taxes make this problem worse. Before, the out-of-pocket tax burden at vesting was purely federal. Now, if your vesting income pushes you past $1 million, you'll owe an additional 9.9% to Washington — still with no liquidity to fund it.
Example: You work at a late-stage private company. Your RSUs vest and are valued at $600,000 based on the most recent 409A valuation. Your base salary is $500,000. Total income: $1.1 million.
- Federal tax on the RSU vesting income: approximately $220,000
- Washington income tax: 9.9% x $100,000 = $9,900
- Total tax owed on shares you can't sell: approximately $230,000
This is why I continue to recommend that early-stage startups use stock options rather than RSUs — options let the employee control when they trigger a tax event.
RSUs vs. Stock Options: The Washington Tax Comparison
With Washington's new tax layers, the choice between RSUs and stock options has meaningful state tax implications.
Stock options (ISOs):
- No tax at grant or vesting.
- Tax triggered at exercise — and with ISOs, potentially only AMT, not ordinary income tax.
- If you meet the holding period requirements (2 years from grant, 1 year from exercise), the gain is long-term capital gains — which means Washington's capital gains tax applies, but only above $250,000.
- The income tax doesn't apply to long-term capital gains from qualifying ISO dispositions because that income isn't ordinary income.
RSUs:
- Tax triggered at vesting as ordinary income — subject to both federal income tax and Washington's income tax (above $1 million).
- Any post-vesting appreciation taxed as capital gains — subject to Washington's capital gains tax (above $250,000).
- Double exposure: RSU holders can be hit by both Washington taxes on different components of the same equity.
Stock options (NSOs):
- Spread at exercise is ordinary income — same Washington income tax exposure as RSUs at vesting.
- But you control the timing of exercise, which means you can plan around the $1 million threshold.
The planning flexibility of stock options — particularly ISOs — becomes more valuable in a state that taxes both ordinary income and capital gains. For more on the ISO vs. NSO decision, see my complete guide to ISOs vs. NSOs.
For a deeper look at how to structure equity compensation plans with taxes in mind, see my equity compensation plan design guide.
Section 409A: The Compliance Layer
RSUs at private companies are classified as deferred compensation under IRC Section 409A. This adds a compliance layer that interacts with Washington's taxes in an important way.
Why it matters: If your company's RSU program doesn't comply with Section 409A, the IRS imposes a brutal penalty: all deferred amounts are immediately included in income, plus a 20% penalty tax, plus interest. That penalty income would also count toward your Washington income tax threshold.
The key compliance requirements for private company RSUs:
- Valuation: The company must establish FMV through an independent 409A valuation, updated at least every 12 months.
- Fixed vesting schedule: Once the vesting schedule is set, it generally cannot be changed without triggering 409A issues.
- Settlement terms: The grant agreement must specify exactly when and how RSUs convert to shares or cash.
- No discretionary acceleration: The company generally cannot accelerate vesting outside of narrow exceptions.
For a full discussion of 409A compliance, see my 409A valuations guide.
Planning Strategies for Washington RSU Holders
Given the new tax reality, here are the strategies worth considering:
1. Manage the $1 Million Threshold
Since Washington's income tax only kicks in above $1 million, the most direct planning opportunity is managing how much income falls into any single tax year.
- If you have flexibility on exercise timing (for options, not RSUs): spread exercises across years to stay under $1 million.
- For RSUs: Vesting is usually set by the grant schedule, so you have less control. But if your company offers any flexibility on grant timing or size, this is worth discussing.
- Negotiate smaller, more frequent grants rather than large cliff-vesting packages that concentrate income.
2. Hold After Vesting (With Caution)
If you sell immediately at vesting, all your RSU income is ordinary income. If you hold after vesting and the stock appreciates, the post-vesting gain is capital gains — which has a $250,000 exemption under Washington's capital gains tax.
But don't hold purely for tax reasons. Concentration risk in a single stock is real. The tax tail shouldn't wag the investment dog.
3. Charitable Giving With Appreciated Shares
If you hold shares after vesting and they appreciate, donating appreciated shares to a donor-advised fund or charity lets you:
- Avoid federal capital gains tax on the appreciation
- Avoid Washington capital gains tax on the appreciation
- Take a charitable deduction for the full FMV
This can be particularly effective in high-income years where you're already over the $1 million threshold.
4. Consider the 83(b) Election (For Restricted Stock Awards, Not RSUs)
If your company grants restricted stock awards (not RSUs), you can file an 83(b) election within 30 days to recognize all income upfront at the grant-date value. This converts future appreciation from ordinary income to capital gains.
The 83(b) election doesn't apply to RSUs — only to restricted stock awards and early-exercised options. But if your company is willing to grant restricted stock instead of RSUs, the 83(b) election becomes a powerful tool in Washington's new tax environment.
5. Accelerate Income Before 2028
The income tax doesn't take effect until January 1, 2028. If you have options you're planning to exercise or any other control over income timing, there's a window to recognize income in 2027 at a 0% Washington income tax rate.
For more strategies on timing around Washington's tax changes, see my post on engineering Washington tax outcomes.
Double-Trigger RSUs and Washington Tax Timing
Many private companies use "double-trigger" RSUs, where the units vest based on time but only settle (convert to shares) upon a liquidity event like an IPO or acquisition.
This creates an interesting Washington tax question: when is the income recognized?
Under federal tax law, the income is generally recognized at settlement — the later of the two triggers. This means if your RSUs time-vest in 2027 but the IPO happens in 2029, you recognize the income in 2029 when settlement occurs.
For Washington tax purposes, this matters because:
- If settlement occurs before 2028: no Washington income tax.
- If settlement occurs in 2028 or later and the income exceeds $1 million: Washington income tax applies.
Employees at pre-IPO companies should be aware that the timing of the liquidity event directly determines their Washington tax exposure. This is one more reason to understand the details of your RSU agreement — ask whether your grants are single-trigger or double-trigger.
For more on double-trigger acceleration, see my guide to double-trigger acceleration.
What About QSBS?
RSUs, by their nature, don't qualify for the Section 1202 QSBS exclusion. Here's why: QSBS requires that stock be acquired at original issuance from the corporation, and held for at least five years. RSUs that vest and settle into shares may or may not meet the original issuance requirement depending on how the settlement is structured, but the more fundamental issue is that the QSBS exclusion only applies to capital gains, not the ordinary income recognized at vesting.
If you're at a qualifying C corporation and want QSBS treatment, stock options (particularly ISOs or early-exercised options with an 83(b) election) are the better vehicle because:
- The shares are issued at exercise, starting the 5-year holding period.
- The gain at sale can qualify for the Section 1202 exclusion.
- The exclusion currently eliminates Washington capital gains tax as well (since excluded gain falls out of the WA tax base).
For more on QSBS planning in Washington, see my guide to QSBS and Washington's capital gains tax.
Key Takeaways
- RSU vesting income is ordinary income — it's subject to Washington's new 9.9% income tax on amounts above $1 million, starting in 2028.
- Post-vesting appreciation is capital gains — it's subject to Washington's capital gains tax above $250,000, at rates of 7% to 9.9%.
- RSU holders face double exposure to both Washington taxes, unlike ISO holders who can potentially avoid the income tax entirely on qualifying dispositions.
- The private company RSU liquidity problem is compounded by Washington's taxes — you owe more tax on shares you still can't sell.
- Stock options offer more planning flexibility in Washington's new tax environment, particularly ISOs with their capital gains treatment.
- The 2027 window matters — income recognized before 2028 avoids the state income tax entirely.
- RSUs don't qualify for QSBS — if Section 1202 benefits are important to your planning, options or restricted stock with an 83(b) election are better vehicles.
This post is for informational purposes only and does not constitute legal or tax advice. Consult a qualified attorney or tax advisor for guidance specific to your situation.
Joe Wallin is a shareholder at Carney Badley Spellman in Seattle, where he leads the startup law practice. He is the author of The Holloway Guide to Equity Compensation and Angel Investing: Start to Finish.
