If you just saw a vesting alert hit your brokerage account and your first instinct was to ask “do I owe taxes on this right now?”, you are not alone. Every quarter, thousands of employees watch shares show up and wonder whether they should hold, sell, or hand some back to cover taxes. The short answer is that vesting is a real tax event, especially for Restricted Stock Units (RSUs), and the IRS treats the income as ordinary wages the moment those shares become yours. Stock options follow a different schedule, but they can produce surprise bills of their own once you exercise or sell.
In this guide, I will walk you through exactly what to do with company stock options and RSUs when they vest. I will cover the two main types of options (ISO and NSO), explain how the Alternative Minimum Tax (AMT) catches people off guard, break down the 83(b) election in plain English, and show you a hold-versus-sell framework you can apply to your own situation. You will also get an annual planning calendar, a FAQ that mirrors the questions real employees ask in forums, and a checklist to use before your next vesting date.
Table of Contents
Stock Options and RSUs at a Glance
Stock options give you the right to buy shares at a fixed price. Restricted Stock Units give you shares outright once they vest. Both are common forms of equity compensation, but the IRS treats them very differently at vesting, at exercise, and at sale.
A stock option grant comes with three dates that matter. The grant date is when the company issues the option. The vesting date is when you earn the right to exercise, although exercising can happen later. The exercise date is when you actually buy shares at the strike price. RSUs collapse this into two dates. The grant date still exists, but the shares vest and are delivered to you on the vesting date, which is also the moment the IRS counts the value as income.
Here is the cleanest mental model. Stock options are a coupon that lets you buy stock at a discount. RSUs are the stock itself, delivered in chunks. The discount on the option is what triggers taxes when you exercise. The full delivered value of the RSU is what triggers taxes when it vests.
What Happens When Stock Options Vest?
Vesting itself is not a taxable event for stock options. You do not owe income tax just because an option becomes exercisable. The clock for income tax starts when you exercise the option and buy the shares.
At exercise, the bargain element becomes ordinary income. The bargain element is the difference between the fair market value (FMV) of the stock on the exercise date and the strike price you pay. Suppose your options have a strike price of $20 and the stock trades at $80 when you exercise. You pay $20 per share to acquire stock worth $80. The $60 spread is added to your W-2 wages for that year and taxed at your ordinary income tax rate.
This is the point many employees miss. You owe taxes even if you do not sell the shares afterward. The IRS treats the spread as compensation, just like your salary. Federal income tax withholding through payroll may apply for NSOs, but for ISOs there is no payroll withholding at all, which is why people get blindsided in April.
What Happens When RSUs Vest?
RSUs are simpler and stricter. The moment the shares vest, the fair market value becomes ordinary income and is added to your W-2. There is no exercise step and no strike price. You did not buy anything. The company simply handed you stock, and the value of that stock on the vesting date is now part of your taxable wages.
Most companies use a sell-to-cover approach. They automatically sell a percentage of your vesting shares to cover federal income tax withholding, often around 22% to 35% depending on the company’s election and your state’s rules. Some companies use a higher supplemental withholding rate for amounts above $1 million. The remaining shares stay in your account, and your W-2 reflects the full value as wages.
This is the moment that surprises people. The 22% federal supplemental withholding rate looks reasonable on paper, but if your total income pushes you into the 32% or 35% bracket, you will owe the difference at tax time. I have seen employees shocked to discover a $30,000 balance due in April because they only had 22% withheld across multiple vestings.
Stock Options vs RSUs: Key Differences (2026)
The differences matter because each award type creates tax events at different times. Here is a side-by-side comparison.
| Feature | Stock Options (NSO) | Stock Options (ISO) | RSUs |
|---|---|---|---|
| Tax at grant | None | None | None |
| Tax at vesting | None | None | Ordinary income on FMV |
| Tax at exercise | Ordinary income on spread | AMT preference item on spread | Not applicable |
| Tax at sale | Capital gain on appreciation | Capital gain on total appreciation if holding rules met | Capital gain on appreciation after vesting |
| Withholding at vesting | None typically | None | Yes (often 22%-35%) |
| Requires payment at exercise | Yes (strike price) | Yes (strike price) | No |
| Risk if stock falls | Options can expire worthless | Options can expire worthless | Shares can lose value after vest |
The takeaway is simple. RSUs create a guaranteed income event on the vesting date. Stock options create a tax event only when you choose to exercise, which gives you timing flexibility but also requires more planning.
ISO vs NSO: Two Very Different Tax Treatments
Non-qualified stock options (NSOs) are taxed like wages at exercise. The spread between strike and FMV lands on your W-2 as ordinary income, and your cost basis in the shares becomes that FMV. When you later sell, you pay capital gains tax on any additional appreciation.
Incentive stock options (ISOs) follow a friendlier path on paper, but only if you meet strict rules. At exercise, no regular income tax is triggered. Instead, the bargain element is an Alternative Minimum Tax preference item, which I will cover in the next section. If you hold the shares for at least two years from the grant date and at least one year from the exercise date, the entire gain from strike to sale is taxed as long-term capital gain.
If you sell ISO shares before meeting those holding periods, you disqualify the disposition. The spread becomes ordinary income, the company reports it on your W-2, and only the additional gain above the spread gets capital gains treatment. Many employees disqualify dispositions without realizing it because they sold qualified shares too soon.
Here is a concrete example. You exercise an ISO with a $20 strike when the FMV is $80, and you sell a year later at $120. You did not meet the two-year-from-grant rule. The $60 spread becomes ordinary income, and only the additional $40 appreciation gets capital gains treatment.
AMT and the $100,000 Rule for ISOs
The Alternative Minimum Tax is a parallel tax system that runs alongside the regular system. You calculate your tax both ways and pay the higher amount. For ISO exercises, the bargain element is added back to your income for AMT purposes even though it is not regular taxable income.
This creates a real cash flow problem. You can owe AMT in April for an exercise that did not generate any regular withholding during the year. In a high-income year, the AMT bill can be tens of thousands of dollars on a single exercise.
The $100,000 rule is separate but related. ISOs that first become exercisable in a given year are limited to $100,000 in value (valued at grant) per calendar year. Anything above that is automatically treated as an NSO. So if you receive an ISO grant worth $250,000 in a year, $150,000 of it converts to NSO treatment right away.
A practical workaround is to exercise ISOs early in the calendar year. If you exercise in January, you lock in the FMV for AMT purposes at the start of the year. If the stock drops later, your AMT exposure shrinks. State AMT rules vary, and some states do not have AMT at all, which can change the math significantly.
You can also avoid AMT by selling the ISO shares in the same calendar year as exercise. That is a disqualifying disposition, but it converts the spread into ordinary income instead of an AMT preference item. If you do not have cash to pay the AMT bill, a same-year disqualifying sale is sometimes the lesser evil.
The 83(b) Election Explained
The 83(b) election lets you pay tax on restricted stock at grant instead of at vesting. It is available for restricted stock awards, restricted stock units that have not yet vested, and some early-exercise option scenarios. It is not available for standard RSUs after grant.
The election must be filed with the IRS within 30 days of the property being transferred. You include the fair market value of the stock at grant as ordinary income, and your future cost basis becomes that FMV. If the stock soars before vesting, all the appreciation is long-term capital gain instead of ordinary income.
The risk is real. If the stock drops after your 83(b) election, you have already paid tax on the higher value and you still owe ordinary income tax on the spread between FMV and sale price when you eventually sell. For RSUs that are clearly going to vest and where you expect the stock to rise, the 83(b) election can be powerful. For early-stage startups, it can be a gamble you wish you had not taken.
Tax Implications at Sale: Short-Term vs Long-Term Capital Gains
Once you own shares after vesting or exercise, selling creates a second tax event. The difference between the sale price and your cost basis is a capital gain or loss. Short-term capital gains apply if you held the shares for one year or less, and they are taxed at ordinary income rates. Long-term capital gains apply if you held the shares for more than one year, and they are taxed at 0%, 15%, or 20% depending on your income.
For RSUs, your cost basis is the FMV at vesting, which is also the amount reported as ordinary income. Selling immediately at vesting means no additional gain or loss. Holding for over a year means all post-vesting appreciation is taxed at long-term capital gains rates.
For NSOs, your cost basis is the FMV at exercise (which was your ordinary income on exercise). For qualified ISO dispositions, your cost basis is the strike price. This is why ISO qualifying treatment produces a lower long-term capital gain.
Wash sale rules do not apply to gains, only losses. If you sell RSU shares at a loss and repurchase the same stock within 30 days, your loss can be disallowed and added to the basis of the new shares. Most investors do not hit this, but it matters if you sell to harvest a loss and your next vesting happens within 30 days.
Hold vs Sell: A Decision Framework
The right answer depends on your goals, your tax bracket, and your concentration risk. Here is the framework I use when I work through my own equity comp decisions.
Sell enough to cover taxes. If your company withholds 22% but your bracket is 35%, you need to sell additional shares to cover the gap or send estimated payments. A common rule is to set aside 35% to 40% of the value for federal taxes plus your state rate.
Reduce concentration. Your salary, your bonus, and your equity all depend on one company. If employer stock is more than 10% to 20% of your total net worth, most financial advisors suggest trimming. Holding all your vested RSUs doubles down on the same bet.
Hold for diversification goals, not for tax optimization alone. Long-term capital gains treatment is meaningful, but it should not drive you to keep a single stock position that could halve in a downturn. Holding for diversification is a reason. Holding because you expect the stock to keep going up is speculation.
Rebalance annually. Treat each vesting as an opportunity to bring your portfolio back to your target asset allocation. If you want 60% stocks and 40% bonds, sell enough on each vest to keep that ratio intact.
Withholding and Estimated Taxes
RSU withholding is supplemental wage withholding. The IRS allows employers to withhold at a flat 22% on supplemental wages up to $1 million per year. Above that, the rate is 37%. Your state may require additional withholding. This default rate is rarely high enough for high-income employees.
If your actual marginal rate is 35% federal plus 10% state, and only 22% federal is withheld, you owe 23% of the value in April unless you made estimated payments. Many employees use Form 1040-ES to send quarterly estimated payments aligned with their vesting schedule.
For NSO exercises, federal income tax withholding is required only if the exercise is not a disqualifying disposition. Your employer can withhold at the supplemental rate or use a flat rate that you agree to in advance. ISO exercises have no withholding at all, so the AMT bill comes due in April.
The safest habit is to set aside cash equal to your marginal federal and state rate plus any AMT estimate as soon as the vesting or exercise happens. Treat that money as if it does not exist.
Avoiding Double Taxation on RSUs
RSUs are not actually double taxed. The value at vesting is ordinary income. When you sell, you only pay capital gains on appreciation above that already-taxed value. The confusion comes from employees thinking they will pay ordinary income tax again on the gain. They will not.
The real risk of double pain is that you pay ordinary income tax on the vesting value and then pay long-term capital gains tax on growth. If you sell immediately, the second tax is zero. If you hold for years and the stock doubles, the second tax is meaningful but at the favorable long-term rate.
To minimize the bite, hold for long-term capital gains treatment, harvest losses in taxable accounts to offset gains, and avoid selling shares within 30 days of any vesting if you have a loss you want to claim.
Concentration Risk and Diversification
If your salary, your bonus, and your equity compensation all depend on one employer, your human capital is already heavily concentrated in that company’s stock. Letting vested RSUs sit in your brokerage account turns a paper concentration into a real one. Industry studies suggest employer stock accounts for a meaningful share of wealth for many tech employees, often far above the 10% to 20% level financial advisors recommend.
A practical approach is to set a target percentage of net worth for employer stock, and sell any vesting shares that push you above that target. Some employees use a 10% ceiling. Others use 25% if they are confident in the company’s outlook. The exact number depends on your risk tolerance, but having a number matters more than the number itself.
Diversification does not require selling everything. It requires deciding, in advance, what portion of your wealth you are willing to tie to one company. Each vesting date is a chance to enforce that decision.
RSU Annual Planning Calendar
Here is a simple quarterly rhythm you can follow.
In January, review your vesting schedule for the year and estimate income from RSUs and planned option exercises. Update your W-4 to reflect the supplemental income and consider adjusting your 401(k) contributions to lower your taxable wages.
In April, reconcile your prior-year actual tax with what was withheld. If you owed more than $1,000 above withholding, set up quarterly estimated payments for the current year using Form 1040-ES.
In June, after the first vesting wave, check whether your supplemental withholding rate matches your marginal bracket. Increase estimated payments if needed.
In October, do a year-end projection before the final vestings. Decide whether to defer income into the next year by delaying any planned option exercises.
In December, finalize tax-loss harvesting in your taxable accounts and review charitable giving plans for appreciated stock you want to donate.
What Happens to Unvested Awards When You Leave
Most equity awards are governed by vesting rules that stop accruing on your last day of employment. Unvested RSUs are usually forfeited. Unvested options are usually forfeited unless your plan allows post-termination exercise of already-vested options.
Vested options typically expire 90 days after termination for NSOs and up to 10 years after termination for ISOs, depending on the plan. The 90-day window is a sharp deadline. Many employees lose out because they waited for the stock to recover before exercising, only to discover the option expired worthless.
If you have a chance to exercise options before leaving, compare the cost of exercising (including AMT and capital you tie up) against the risk of forfeiture. Some companies allow a cashless exercise through a same-day sale, but that converts incentive treatment into disqualifying disposition treatment in many cases.
IPO and Liquidity Event Scenarios
If your employer goes public or is acquired, the rules around your equity change quickly. A six-month lockup is standard after an IPO. During that window you cannot sell shares, even if they vest. After the lockup ends, you can trade, but the price often drops in the first days of public trading.
RSUs held through an IPO vest on schedule but are taxed on the IPO-day FMV if that is the vesting date, or on the actual vesting-date FMV if vesting happens after the IPO. Either way, ordinary income applies. Pre-IPO options with a low strike price create a particularly large bargain element on IPO day, which can trigger both AMT and a sharp increase in your marginal tax bracket.
In an acquisition, your unvested awards are often converted into cash or acquirer stock at the deal price, then subject to a new vesting schedule. The conversion itself can be a tax event if it is treated as a constructive sale. Read the merger documents carefully and consider negotiating for acceleration of vesting if your role is at risk post-close.
Charitable Giving With Appreciated Stock
If you hold vested shares with a low cost basis and a large unrealized gain, donating the shares directly to charity or to a donor-advised fund can be more tax-efficient than selling and donating cash. You avoid capital gains tax entirely, and you can still deduct the fair market value as a charitable contribution if you itemize and have held the shares for more than one year.
This strategy works best in years where you have a high income from vesting and a charitable intent anyway. Donating shares that you would have sold for diversification is a clean way to convert volatile equity into a meaningful deduction without paying capital gains along the way.
Donor-advised funds let you take the deduction in the current year while deciding which charities to support later. That timing flexibility is valuable when you have a one-time spike in income from a large vesting or IPO.
Frequently Asked Questions
What should I do with my RSUs when they vest?
Sell enough shares to cover federal and state taxes at your marginal rate, not just the 22% supplemental withholding rate. Then decide what to do with the remainder based on your concentration limit, usually 10%-20% of net worth. If employer stock is already above your target, sell the rest and reinvest in a diversified portfolio.
How are RSUs taxed when they vest?
RSUs are taxed as ordinary income at vesting. The fair market value on the vesting date is added to your W-2 wages, and your employer withholds federal income tax (typically 22%-35%) plus any required state taxes. Your cost basis becomes that FMV, so future gains are taxed as capital gains.
Are stock options taxable when they vest?
No. Stock options are not taxed at vesting for either ISOs or NSOs. The tax event happens when you exercise the option. The bargain element (FMV minus strike price) becomes ordinary income for NSOs and an AMT preference item for ISOs.
How do I avoid getting double taxed on RSUs?
RSUs are not actually double taxed. You pay ordinary income tax on the value at vesting and capital gains tax only on appreciation after vesting. To minimize the second tax, hold shares for more than one year for long-term capital gains rates, harvest losses to offset gains, and avoid wash sales within 30 days of vesting.
What is the $100,000 rule for stock options?
The $100,000 rule limits the value of ISOs that first become exercisable in a single calendar year to $100,000 (measured at grant). Any ISO value above that limit automatically converts to NSO treatment, losing the preferential tax treatment.
Do I have to sell RSUs when they vest?
No, you do not have to sell. You owe the same tax regardless of whether you hold or sell. However, most employers automatically sell a portion through sell-to-cover withholding, so you usually cannot keep 100% of the vested shares anyway.
How long should I hold RSUs after they vest?
Hold for at least one year and one day after vesting to qualify for long-term capital gains treatment. Holding longer is a portfolio decision, not a tax decision. The one-year threshold is the meaningful tax milestone.
The Bottom Line
What to do with company stock options and RSUs when they vest comes down to three things. First, treat the vesting date as a real tax event, especially for RSUs where income is recognized immediately. Second, set aside enough cash to cover your actual marginal tax rate, not just the supplemental withholding rate. Third, use the vesting date as a forcing function to manage concentration risk and rebalance your portfolio.
Start with a clear picture of your vesting schedule, your marginal tax bracket, and your employer’s withholding rate. Then decide in advance what percentage of vesting shares you will sell and what you will hold. The employees who handle equity comp best are the ones who make these decisions before the alert shows up, not after. If you want a deeper look at specific dollar amounts for your situation, run the numbers with a CPA or fee-only financial planner who specializes in equity compensation.