RSUs vs. ISOs: how they're taxed and which one you have
RSUs and ISOs are the two most common forms of equity compensation at tech companies, and they're taxed nothing alike. Many employees hold both without realizing the strategies for each point in opposite directions.
How to tell which you have
- RSUs (Restricted Stock Units): your grant shows a number of units. They convert into shares automatically on a vesting schedule. You never pay anything to receive them.
- ISOs (Incentive Stock Options): your grant shows a number of options with a strike (exercise) price. Nothing happens until you choose to exercise — paying the strike price out of pocket to buy the shares.
Check your equity platform (Fidelity, Schwab, Carta, Shareworks): the grant type is always labeled.
How RSUs are taxed
Simple and unavoidable: at vesting, the fair market value becomes W-2 ordinary income — taxed at your marginal rate plus payroll taxes. You owe it whether you sell or hold. After vesting, further price changes are capital gains or losses. There is no decision to make at vest time that changes the tax; the only planning is covering the bill (see the 22% withholding trap).
How ISOs are taxed
ISOs give you choices — and choices mean planning:
- At exercise: no regular income tax. But the "bargain element" (market price minus strike price) counts as income under the Alternative Minimum Tax system, which can create a real tax bill (see ISO exercises and AMT, explained simply).
- At sale, if you meet the holding periods (more than 2 years from grant and more than 1 year from exercise): the entire gain is taxed at long-term capital gains rates — currently 0%, 15%, or 20% for most people, far below ordinary income rates.
- At sale, if you sell early (a "disqualifying disposition"): the bargain element is taxed as ordinary income, like an RSU.
Which is better?
It depends on what you value:
- ISOs win on taxes when the stock grows and you can afford to exercise and hold through the qualifying periods. All appreciation gets capital-gains treatment.
- RSUs win on certainty. They're always worth something (unless the stock goes to zero), require no cash out of pocket, and can't create an AMT bill. ISOs can expire worthless and can generate tax on money you haven't received.
- Most people don't choose — their company grants one or the other. The practical move is to run the right playbook for whatever you hold, not to wish for the other.