The 3.8% Tax Nobody Mentions When You Sell RSUs to Diversify
She is a senior director of product at a publicly traded tech company. Eight years in. The RSUs that felt like a bonus early on have quietly stacked into about $2.4 million of one stock. She knows her company withholds 22 percent on each vest, and she knows that is not enough. She started selling shares to diversify, working through a plan her financial advisor helped with.
What nobody told her: every time she sells, an extra 3.8 percent hits the gain. Not the 22 percent her company withholds. Not the capital gains rate she expects. A separate surtax called the Net Investment Income Tax, and it shows up as a surprise when her return gets filed.
What the 3.8 Percent NIIT Actually Is (and How It Hits RSU Holders)
The Net Investment Income Tax is a 3.8 percent surtax on investment income that kicks in once your modified adjusted gross income passes $200,000 for a single filer or $250,000 for married filing jointly. It applies to capital gains, dividends, interest, rental income, and a few other categories. It does not apply to your salary, your bonus, or the value of RSUs on the date they vest.
But here is where the trap lives.
Your RSU income pushes your MAGI well past the NIIT threshold. Every quarter your RSUs vest, the value counts as wage income. So by the time you are a senior director or VP at a public tech company, you are solidly inside the NIIT zone all year.
When you sell some of those RSU shares for diversification, any gain from the vest date to the sale date is a capital gain. And because your MAGI is already above the threshold, that gain gets the 3.8 percent surtax stacked on top of whatever capital gains rate you pay.
How RSU Sales Trigger NIIT: A Walkthrough
Take a specific case. She sells 1,000 shares at $150 each. Those shares were worth $120 each on the vest date. Her gain is $30 per share, or $30,000 total.
She expects capital gains tax on that $30,000. If she is in the 20 percent long-term capital gains bracket, that is $6,000. What she may not have planned for is the additional 3.8 percent NIIT on the same $30,000, which adds $1,140.
A thousand dollars here, a thousand dollars there. Over the course of a multi-year diversification plan, those increments add up into something meaningful.
The real surprise comes in April. Her CPA files her return, and the NIIT line item shows up as a number she never budgeted for. She was prepared for capital gains. She planned for state tax. The 3.8 percent surtax was not on her radar.
A strategist who works year-round would have flagged this before the first sale. The NIIT calculation depends on the full year picture: how much RSU income she will recognize, what other investment income she has, and what her filing status is. That data exists by midyear. The question is whether anyone is looking at it before December.
The Problem With a 10b5-1 Plan and NIIT
Many executives set up a 10b5-1 plan to sell shares on a regular schedule. It is a smart move for compliance. The plan sells, the cash hits your account, and you stop thinking about it.
What the 10b5-1 plan does not do is calculate NIIT for you. The plan does not know your MAGI. It does not know what other income you will have for the year. It sells on schedule, and the gain accumulates.
If your 10b5-1 plan sells shares in January when your income picture is still forming and then your RSUs vest through the year, you could see your full year NIIT liability land in a way you did not anticipate. Or if the plan sells throughout the year and your other income keeps MAGI high, every sale is subject to the surtax.
The plan handles the compliance side. It does not handle the tax strategy. For a deeper look at how a 10b5-1 plan interacts with your tax bill, read our post on 10b5-1 plans and RSU taxes.
Three Ways to Plan Around It
1. Sell across multiple tax years
The simplest strategy is spreading your RSU sales across multiple years so no single year concentrates a large gain. This keeps you in control of your tax bracket and lets you manage how much gain is recognized each year.
This does not mean avoiding NIIT entirely. If your MAGI is above $250,000, NIIT applies. It means knowing exactly how much gain you will recognize each year and what the total tax bill will look like before you sell, not after.
2. Pair sales with tax-loss harvesting
If you have other investments with unrealized losses, selling them in the same year as your RSU sales can offset the gains. The losses reduce your net investment income, which reduces the NIIT base.
This requires coordination between your investment advisor and your tax strategist. If they do not communicate, the opportunity passes without anyone noticing. We have written about why that coordination matters in more detail.
3. Donate appreciated shares instead of selling
If you give to charity each year, donating appreciated RSU shares instead of cash eliminates the capital gain entirely. No capital gains tax. No NIIT. And you still get a charitable deduction for the fair market value.
We covered how this works with a donor advised fund in an earlier post. The same mechanics apply whether you use a donor advised fund or give directly.
Each of these strategies depends on planning before the year closes. You cannot undo a December sale in April.
Why Your Preparer Probably Did Not Mention It
Most tax preparers file returns. They look backward at what happened and calculate the number. NIIT appears as a line item on the return. They compute it. You pay it.
A tax strategist works differently. They look at the year ahead, model your RSU vesting schedule, estimate the gain from planned sales, and ask: where is NIIT going to hit, and what can we do before December 31?
That is the difference between compliance and strategy. Your preparer files your return. Your strategist designs the outcome before the year closes. We have written before about why that distinction matters more than most high earners realize.
If you hold a concentrated RSU position and you are planning to diversify, the right time to understand the NIIT impact is before you sell your first share. A 15-minute call is enough to tell you whether your current plan is leaving a 3.8 percent gap that you will not see until next April. Call (619) 280-2700 or email info@RoadmapTax.com.
FAQ
What is the Net Investment Income Tax on RSU sales?
The Net Investment Income Tax is a 3.8 percent surtax on capital gains and other investment income that applies when your modified adjusted gross income exceeds $200,000 for single filers or $250,000 for married couples filing jointly.
Do RSUs themselves trigger NIIT?
No. RSUs vest as wage income, which is not subject to NIIT. But when you sell RSU shares after they vest, any gain from the vest date to the sale date is a capital gain that may be subject to the surtax.
How do I avoid NIIT when selling RSU shares?
You cannot avoid NIIT entirely if your income is above the threshold, but you can plan around it by spreading sales across multiple tax years, pairing sales with tax-loss harvesting in other accounts, or donating appreciated shares to charity instead of selling.
Does my 10b5-1 plan account for NIIT?
No. A 10b5-1 plan handles trading compliance and blackout windows but does not calculate or account for NIIT. The surtax depends on your total income for the year, which the plan does not track.
Should I talk to a tax strategist before selling RSUs?
Yes. A strategist can model your full year income, estimate the NIIT impact of planned sales, and help you choose timing and methods that reduce the total tax bill. A preparer who files your return in April may not flag this cost before you sell.
