Stock Options vs RSUs: Tax Treatment Explained (2025)

Introduction

Equity compensation can be worth millions, but the tax treatment catches many employees off guard. Understanding the difference between stock options and RSUs—and how each is taxed—is essential for maximizing your wealth.

Types of Equity Compensation

Stock Options

Options give you the right to buy shares at a set price (strike price). Two types exist:

• Incentive Stock Options (ISOs): Tax-advantaged, US only
• Non-Qualified Stock Options (NSOs/NQSOs): Standard treatment

Restricted Stock Units (RSUs)

RSUs are promises to give you shares when they vest. No purchase required.

Tax Treatment Comparison

NSOs (Non-Qualified Stock Options)

• At Grant: No tax
• At Exercise: Ordinary income tax on (FMV - Strike Price)
• At Sale: Capital gains on (Sale Price - FMV at exercise)

ISOs (Incentive Stock Options)

• At Grant: No tax
• At Exercise: No regular tax (but AMT may apply)
• At Sale: Long-term capital gains if held 2+ years from grant, 1+ year from exercise

RSUs

• At Grant: No tax
• At Vest: Ordinary income tax on full FMV
• At Sale: Capital gains on (Sale Price - FMV at vest)

Strategies to Minimize Taxes

For Stock Options

1. Early exercise with 83(b) election: Exercise immediately and elect 83(b) to start capital gains clock early
2. Exercise in low-income years: If you take a sabbatical or between jobs, consider exercising then
3. Spread exercises across tax years: Avoid bunching income in one year

For RSUs

1. Sell immediately to diversify: You have already been taxed; holding concentrates risk
2. Consider tax-loss harvesting: Offset RSU income with realized losses
3. Max out 401(k): Reduce taxable income in high-vest years

Conclusion

Equity compensation is complex, but understanding the basics helps you make better decisions. For significant grants, consider consulting a tax professional who specializes in equity compensation.