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How Stock Options and RSUs Get Taxed

If you work in tech or at a public company, part of your pay may come in stock. Each kind is taxed differently, and the timing matters as much as the amount.

In one minute

  • RSUs are taxed as wages when they vest, at their value that day.1
  • Nonqualified options (NSOs) create wage income when you exercise, on the "spread."1
  • Incentive options (ISOs) aren't taxed as regular income at exercise, but the spread can trigger the alternative minimum tax.2
  • The tax withheld on stock pay is often less than what you'll owe. California also taxes the gains as regular income.34
Part 1

Restricted stock units (RSUs)

An RSU is a promise to give you shares once you meet a condition, usually staying employed until a vesting date.

  1. GrantNo tax. You've been promised shares.
  2. VestThe shares' value that day is taxed as wages, shown on your W-2.1 That value becomes your cost basis.
  3. SellAny change from the vesting-day value is a capital gain or loss: long-term if you held more than a year.
Selling right at vesting usually means little or no extra gain. Holding is a separate investment decision: you're choosing to keep owning your employer's stock.
Part 2

Stock options: NSOs and ISOs

An option lets you buy shares at a set price (the strike price). The difference between the stock's value and the strike price when you buy is the spread.

Nonqualified (NSO)Incentive (ISO)
At exerciseSpread is taxed as wages1No regular income tax, but the spread counts for AMT2
At saleCapital gain or loss from the exercise-day valueLong-term gain on everything above the strike price, if holding rules are met2
Holding rulesNone for tax treatmentHold at least 2 years from grant and 1 year from exercise2
Break the rulesN/APart of the gain becomes ordinary income (a "disqualifying disposition")2

A hypothetical NSO example: you exercise 1,000 options with a $10 strike when the stock is $40. The $30,000 spread is wage income that year, even if you don't sell a single share.

Part 3

Employee stock purchase plans (ESPPs)

Many companies let you buy shares through payroll at a discount, often up to 15%. In a qualified plan, there's no tax when you buy. When you sell, part of the gain (generally tied to the discount) is ordinary income and the rest is capital gain, depending on how long you held.1

Part 4

Common traps

Under-withholding

Employers often withhold federal tax on stock pay at the flat supplemental rate of 22% (37% on supplemental wages over $1 million).3 If your top bracket is higher, you may owe more in April. Estimated payments can help avoid a surprise.

California taxes it all as regular income

California doesn't have a lower rate for long-term capital gains. Gains are taxed at the same rates as wages.4

Too much in one stock

Between your paycheck, vesting shares and an ESPP, your job and a big part of your savings can depend on one company. Many people set a personal limit and a selling schedule.

Forgetting the basis

Broker forms sometimes report a $0 or wrong basis for RSU and ESPP shares. Using it as-is can mean paying tax twice on the same income.

Have stock pay and not sure what to do with it?

A conversation can lay out your grants, vesting dates and tax timing in one place, so you can make decisions on purpose and know what to confirm with your CPA.

Book a time with Kevin Educational only, not tax advice. Confirm your situation with a qualified tax professional.

Sources

  1. IRS, Topic No. 427, Stock Options, and Publication 525, Taxable and Nontaxable Income (restricted property, stock options, ESPPs). Accessed November 10, 2026.
  2. IRS, Publication 525 (incentive stock options) and Instructions for Form 6251, Alternative Minimum Tax. Accessed November 10, 2026.
  3. IRS, Publication 15 (Circular E), supplemental wages. Accessed November 10, 2026.
  4. California Franchise Tax Board, Capital gains and losses. Accessed November 10, 2026.

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