Dear Caughtinbetween, Vested shares are considered as salary income for the year in which it vests and become taxable if you sell the shares and hence attracts regular federal taxes. The company generally ask for strike price or cost for the options and that is deductible from the amount for which shares were sold. If the vesting and sale happens simultaneously, since the shares were not held for more than 12 months, it becomes short term capital gains like regular income. If the shares vest and you pay only taxes and retain for more than 12 months, then, the sale consideration at the time of sale becomes long term capital gains like any other shares. Now, there is a different tax opinion on vesting. Some have the view, the strike price once paid to the company, the shares are not taxable until it is sold as capital gains arises only when you sell shares. There is another tax opinion that says since shares are issued by the company to you (which itself is considered as sale of shares at discounted price) at the time of vesting when you pay the strike price, the difference between market price and strike price paid by you to the company is deemed as value of the shares and you will be liable to pay taxes as short term on entire shares transferred to you.