Key Takeaways
- RSUs are taxed as wages when they vest; the common mistake is under-withholding at high incomes.
- ISOs get capital-gains treatment if you meet two holding periods, but exercises can trigger AMT; NSOs are taxed at exercise.
- ESPP discounts are taxable, but qualified plans with a lookback are usually worth maxing anyway.
Equity compensation comes in four common flavors, and each is taxed on its own schedule: restricted stock units when they vest, non-qualified options when you exercise, incentive stock options potentially twice under two different tax systems, and employee stock purchase plans when you sell. Knowing which events create tax, and which are elective, is most of the game.
Here is the map, in the order most people encounter them. For the investment side, how much company stock to keep, see our concentration guide.
RSUs: Taxed Like a Cash Bonus
When RSUs vest, their market value lands on your W-2 as ordinary wages, exactly as if you were paid cash and bought the stock the same day. The trap is withholding: employers commonly withhold at a flat supplemental rate that can sit well below a high earner's true marginal rate, quietly building an April balance due. Check withholding in any big vest year and make estimated payments if needed.
After vest, only subsequent movement matters: sell immediately and there is almost no additional tax; hold and future gains are capital gains with a basis equal to the vest-date value. Holding vested RSUs is a fresh decision to buy your employer's stock.
Options: NSOs Versus ISOs
Non-qualified options are simple: at exercise, the spread between strike and market price is ordinary wage income; later movement is capital gain or loss. Incentive stock options are the complicated prize: no regular tax at exercise, and if you hold shares two years from grant and one year from exercise, the entire spread becomes long-term capital gain. The catch is the alternative minimum tax: a large ISO exercise-and-hold can trigger AMT on paper gains, occasionally on shares that later crash.
Common tactics: exercise ISOs early in the year so you can reassess before filing, size exercises to stay under your AMT crossover, and never let tax hope override concentration risk.
Try it: the free The Wealth Checkup takes a couple of minutes and shows you where you stand. Or explore tax planning at Attend.
ESPP: the Discount Is Usually Worth It
A qualified ESPP typically sells you company stock at up to a 15% discount, often with a lookback that applies the discount to the lower of two prices. The discount portion is eventually taxed as ordinary income, with the split between ordinary and capital gain depending on how long you hold. The expected return on a 15% discount with a lookback is high enough that maxing participation and selling promptly is a solid default for anyone whose cash flow allows it.
Coordinating It All
The pieces interact: a big RSU vest year is a bad year for a large ISO exercise; charitable gifts of appreciated shares pair beautifully with vesting schedules; and harvested losses can absorb gains from diversification sales. The goal is a multi-year map of vests, exercises, and sales that smooths income across brackets rather than lurching between windfall years and quiet ones.
This is core territory for our equity and business planning service, and the free equity compensation guide goes deeper on each flavor.
Frequently Asked Questions
Should I sell RSUs as soon as they vest?
Selling at vest adds almost no tax beyond what vesting already triggered, and it converts a concentrated position into diversifiable cash. Unless you would happily buy the same dollar amount of company stock with a cash bonus, selling is the cleaner default.
What is the AMT trap with ISOs?
Exercising and holding ISOs creates alternative-minimum-tax income equal to the spread, even though no regular income is recognized. A big exercise can mean a five- or six-figure AMT bill on gains that exist only on paper.
How do I avoid double-counting ESPP income?
Brokers often report only your purchase price as basis, while the discount already appeared on your W-2. Adjust your basis on Form 8949 when you sell, or you will pay tax on the discount twice.
Tony leads Attend Wealth, a fee-based wealth management firm in Atlanta serving professionals, families, and business owners. Advisory services are held to a fiduciary standard. More about Attend
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