Educational information, not individual financial advice.
Key Takeaways
Employer equity can be a big part of compensation, and the three common forms are each taxed differently — at different moments and at different rates. Getting the timing wrong is an expensive surprise.
Restricted Stock Units become yours on a vesting schedule. At vesting, the full fair-market value is ordinary income, reported on your W-2 (with supplemental withholding — 22% up to $1M of supplemental wages, 37% above). The vest-date price becomes your cost basis; if you sell later, you owe capital gains tax only on the change since vesting.
A common mistake: holding RSUs after vesting as if they were a "discount." They aren't — you've already paid ordinary-income tax on them, so holding is simply a decision to keep a concentrated stock position.
Non-qualified Stock Options are taxed as ordinary income at exercise, on the bargain element (market price − strike price), also W-2 reported. Your basis becomes the exercise-date price; a later sale is capital gain or loss from there.
Incentive Stock Options are the tax-favored ones, but with a catch:
The classic trap is exercising ISOs and holding into the new year without modeling the AMT first.
For restricted stock (not RSUs) or early-exercised options, an §83(b) election filed within 30 days lets you be taxed now, at the low current value, so future appreciation is capital gain. The risk: if the shares are later forfeited, you've paid tax on something you never kept.
Equity comp ties your human capital and your financial capital to the same company — if it stumbles, your job and your savings fall together. The standard mitigant is unglamorous: systematically sell vested shares and diversify, rather than letting one employer dominate your net worth.
How are RSUs, NSOs, and ISOs taxed differently at their key moment?
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