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How is equity compensation taxed?

Equity compensation is taxed when you receive the shares and again, on any growth, when you sell. RSUs are taxed as wages when they vest, NSOs when you exercise, ISOs can trigger the alternative minimum tax, and ESPP shares are taxed when you sell.

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How does each type of equity get taxed?

The type of award decides when ordinary income hits and how much of the gain can qualify for lower capital gains rates. Once you own the shares, any gain is a capital gain: taxed as ordinary income if you sell within a year, and at 0%, 15%, or 20% if you hold longer.

Award Taxed as wages Taxed as a capital gain Watch for
RSUs Full share value at vest Growth after vest, when you sell 22% withholding below your bracket
NSOs The spread at exercise Growth after exercise, when you sell Cash for the exercise price and the tax
ISOs Nothing at exercise; part of the gain if sold early The full gain over the exercise price, if held 2 years from grant and 1 year from exercise AMT in the year you exercise
ESPP (Section 423) Part of the discount, at sale The rest of the gain, at sale Holding periods of 2 years from offering and 1 year from purchase

How are RSUs taxed?

When RSUs vest, the value of the shares is wages: it appears on your W-2 and owes income tax, Social Security up to the annual wage base, and Medicare tax. The value at vest becomes your cost basis, so if you sell right away there is little or no further gain.

Your employer withholds by selling or holding back shares, usually at the flat 22% supplemental rate, or 37% on supplemental wages above $1 million in a year. A $100,000 vest for someone in the 35% bracket has $22,000 withheld against about $35,000 of federal income tax: a $13,000 shortfall before state tax. Why RSUs are taxed so high and the RSU tax calculator walk through the math.

How are ISOs and NSOs taxed?

Both are options to buy shares at a fixed exercise price. The difference is when the spread is taxed, and as what.

  1. 01

    Nonqualified stock options (NSOs)

    The spread at exercise is taxed as wages, even if you don't sell.

  2. 02

    Incentive stock options (ISOs)

    No regular tax at exercise, but the spread can trigger AMT. Hold 2 years from grant and 1 from exercise for long-term rates.

How is ESPP taxed?

A Section 423 ESPP lets you buy company stock at up to a 15% discount with no tax at purchase, up to $25,000 of stock a year measured at the offering-date price. You pay tax when you sell.

Sell more than 2 years after the offering date and more than 1 year after the purchase date and it is a qualifying disposition: ordinary income is limited to the discount measured at the offering date, or your actual gain if smaller, and the rest is long-term capital gain. Sell sooner and the full discount at purchase is wages, even if the price has since fallen.

What should you decide before a vest, exercise, or sale?

01

Cover the withholding gap

Compare withholding with your bracket and set aside the difference, or raise withholding before year-end.

02

Model the AMT first

Model the AMT before an ISO exercise. Spreading exercises across tax years keeps more of the spread under the exemption.

03

Keep your cost basis records

Brokers often report RSU, NSO, and ESPP basis on Form 1099-B without the income already taxed on your W-2, which double counts it unless the return is adjusted. Forms 3921 (ISO exercises) and 3922 (ESPP purchases) hold the numbers you need.

04

Watch the calendar

Trading windows, lockups after an IPO, and option expiration all set deadlines. Many plans give you 90 days to exercise after you leave, and ISOs exercised more than three months after you leave are taxed as NSOs.

05

Decide how much company stock to keep

Your salary, unvested grants, and vested shares all depend on one company, so set a selling plan before a vest rather than after a drop.

How Nino helps with equity compensation planning

Equity compensation planning connects your stock grants with the cash and taxes involved in receiving, exercising, or selling shares. Grant type, timing, and sale restrictions can change your options. Use Nino’s AI software to understand your grants and explore scenarios; add a CPA and CFP team to build a plan around them.

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  • Understand what you’ve been granted

    Restricted stock units (RSUs) and stock options work differently. Review your award type, vesting schedule, option exercise price, and expiration date. Those details tell you when shares may become available, whether you need cash to buy them, and which decisions have a deadline.

  • Budget for an option exercise

    Exercising an option can require both the purchase price and money for taxes. Incentive stock options (ISOs) can also create alternative minimum tax. Compare that cash need with what you can afford to tie up, especially if private-company shares cannot readily be sold.

  • Check what withholding covers

    Shares sold or withheld for taxes do not necessarily cover your final tax bill. Compare the amount withheld with your other income and expected tax obligation. Your CPA can help identify a potential shortfall and plan payments before you spend the proceeds.

  • Decide how much company stock to hold

    Consider your existing shares, future grants, and income from the same employer together. Then weigh a possible sale against your goals, trading restrictions, and tax costs. Nino’s scenarios help you explore the tradeoffs; your human team helps turn them into a plan.

Guides and calculators

Go deeper on equity compensation planning with Nino’s guides and free calculators.

Frequently asked questions

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