Equity Compensation: Taxes on RSUs, Stock Options, and Share Sales
Stock compensation can create a tax bill before you sell any shares. The timing depends on the award: receiving RSU shares, exercising an option, and selling stock can each have different tax consequences.
Before an exercise or sale, compare the tax cost with the cash you'll need and how much of your savings would remain tied to your employer. A lower tax rate may come with a longer holding period and more investment risk.
Which kind of award do you have?
This comparison covers common awards for U.S. employees. Your plan's terms and any special tax elections can change the result.
| Award | When tax generally arises | What to watch |
|---|---|---|
| Restricted stock units (RSUs) | Ordinary compensation when the award is paid in cash or you acquire ownership of the shares, often at vesting. | Payroll taxes may arise earlier for deferred awards. Holding the shares doesn't defer the compensation income. |
| Nonqualified stock options (NSOs) | Ordinary compensation at exercise, generally equal to share value minus the exercise price. | A later sale creates a separate capital gain or loss. |
| Incentive stock options (ISOs) | Generally no regular income tax at exercise, but alternative minimum tax may apply. | Sale timing determines whether the gain qualifies entirely for long-term capital gain treatment. |
| Qualified employee stock purchase plan (ESPP) | Selling the shares generally triggers tax. | Even a sale meeting the holding requirements can include ordinary compensation from the purchase discount. |
The IRS explains the option and ESPP rules in Publication 525. An RSU is a promise to pay shares or cash, which differs from restricted stock you already own.
RSUs and NSOs: withholding may leave a balance due
RSU settlements and NSO exercises commonly produce W-2 wages. Employers may sell or withhold shares to cover taxes, so the shares you receive can be fewer than the award shown in your account.
For 2026, employers can use a 22% federal supplemental withholding rate when the applicable conditions are met. The portion of annual supplemental wages exceeding $1 million is subject to 37% withholding. These are withholding rules; your final tax depends on your full return. Payroll taxes and state taxes can also apply.
If your marginal income tax rate exceeds the withholding rate, an award can leave tax due at filing. Whether additional payments are needed to avoid an underpayment penalty depends on your overall withholding and estimated payments. IRS Publication 15 explains supplemental withholding.
ISOs: compare selling now with holding the shares
An ISO exercise can increase income under the alternative minimum tax, or AMT, calculation even when you keep every share. AMT is a separate calculation that can increase your federal income tax.
For favorable ISO sale treatment, you generally must hold the stock beyond both two years after the option grant and one year after the shares are transferred at exercise. Selling sooner generally creates ordinary compensation, with any remaining gain or loss treated under the capital-gain rules.
Hypothetical example, ignoring fees: You exercise qualifying ISOs for 1,000 unrestricted shares at $10 each when the shares are worth $30 each. You pay $10,000. If you hold them through year-end, the $20,000 spread generally enters your AMT calculation. That is additional AMT income, not a $20,000 tax bill.
If you later sell for $35,000 after meeting both holding periods, your regular-tax capital gain is $25,000. Your AMT basis is generally $30,000, giving a $5,000 AMT gain. The return accounts for that difference. The result changes if the sale fails the holding requirements.
Selling ordinary unrestricted ISO shares in the same calendar year as exercise generally eliminates the exercise-related AMT adjustment for those shares. Other AMT can still apply. Holding shares exposes you to price declines while the exercise-year tax may remain due. Form 6251 instructions explain these calculations.
AMT from an ISO exercise may generate a credit for later years. The timing and amount you can use depend on future returns, so don't assume an immediate refund. See Form 8801.
Check the basis when shares are sold
Basis is the amount used to calculate your gain or loss. For NSO shares, it generally includes both the exercise price and compensation already included in income. For ordinary RSU settlements, it generally includes the value taxed when you acquired the shares.
The broker's Form 1099-B may omit compensation included on your W-2. Using that incomplete basis can tax the same value twice. The correction on Form 8949 depends on whether the broker reported basis to the IRS. See the Form 8949 instructions.
Restricted stock has a separate election
If you receive actual stock subject to forfeiture, a Section 83(b) election may let you recognize compensation at transfer instead of vesting. The amount is the stock's value for tax purposes minus what you paid. Restrictions that will lapse are disregarded when determining that value. This election doesn't apply to an unfunded RSU promise.
The election generally must be filed within 30 days after the stock transfer. Paying tax early carries risk: forfeiting the stock doesn't give you a deduction for the compensation previously included. Review the consequences before electing. The IRS provides Form 15620 and filing instructions.
Planning before exercising or selling
Compare exercising and selling with exercising and holding, including the cash needed for the purchase and taxes. Higher earners may also owe the 3.8% net investment income tax on investment gains. Employment income itself isn't subject to that tax, but it can raise the income used to determine whether the tax applies.
Check deadlines before leaving a job. ISO tax treatment generally requires exercise within three months after employment ends, with special rules for disability and death. Your plan may give you less time to exercise.
Company trading restrictions also matter. Executives considering a Rule 10b5-1 trading plan should coordinate with securities counsel because the plan's protection depends on meeting specific conditions.
A tax projection before the transaction can show the cost of each choice. That leaves you able to weigh the tax result against the amount of employer stock you want to keep.