Executive Summary

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RSU vs Stock Options: Complete Tax Comparison Guide

RSUs and stock options differ fundamentally in taxation timing, tax rates, and risk exposure, with RSUs taxed as ordinary income upon vesting and stock options offering more flexible tax treatment depending on their classification.

Tax Treatment Overview

Restricted Stock Units (RSUs)

RSUs are taxed as ordinary income when they vest, based on the fair market value (FMV) of the shares at vesting.[1][3] The taxable income equals the full market value of vested shares, which can push employees into higher tax brackets.[3] Employers are required to withhold 22% for federal income taxes on the first $1 million in supplemental income, with 37% withheld on amounts exceeding $1 million.[4]

Unlike stock options, employees cannot time the tax event with RSUs—taxes are owed automatically upon vesting.[1] However, employees may sell a portion of vested shares to cover tax liability or explore deferral strategies to avoid income spikes in a single year.[3]

Stock Options: NSOs vs. ISOs

Stock options fall into two categories with distinct tax treatments:

Non-Qualified Stock Options (NSOs) are taxed as ordinary income upon exercise, based on the "spread"—the difference between the stock's fair market value on the exercise date and the strike price.[2][5] This can result in substantial tax liability at ordinary income rates (up to 37% federally as of October 2025).[9]

Incentive Stock Options (ISOs) offer more favorable tax treatment. Under IRC §422, ISOs are not taxed at exercise under the regular tax system, though they may trigger Alternative Minimum Tax (AMT).[2][3] If you meet holding period requirements—at least one year from exercise and two years from the grant date—gains are taxed as long-term capital gains at lower rates than ordinary income.[2][3]

Key Numerical Thresholds and Limits

ISO Annual Limit: Employers can issue ISOs with a maximum value of **$100,000 per emplo

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Footnotes

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Primary Sources

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Disclaimer: This guide discusses legal tax optimization strategies only. Tax evasion is illegal and is never recommended. This content is for educational purposes and does not constitute tax, legal, or financial advice. Tax laws vary by jurisdiction and change frequently. Always consult a qualified tax professional (CPA, tax attorney, enrolled agent) before making decisions based on this information. The authors accept no liability for actions taken based on this content.