NSO vs ISO vs RSU: The One-Page Tax Cheat Sheet
NSOs, ISOs, and RSUs are taxed at three different moments. NSOs are taxed as ordinary income when you exercise. ISOs owe no regular tax at exercise — but the spread can trigger the Alternative Minimum Tax, and you only keep the capital-gains payoff if you hold through both holding periods. RSUs are taxed as ordinary income when they vest.
The rate gap is the point: ordinary income tops out at 37% federally in 2026, while long-term capital gains top out at 20% (plus a 3.8% net investment income tax for higher earners).
Three letters show up in almost every tech offer letter: NSO, ISO, RSU. They look interchangeable, but the IRS treats them as three different animals — taxed at different times, at different rates, with different traps. Get the timing wrong and you can owe tax on shares you cannot sell, or leave five figures on the table by selling a month too early.
This is the cheat sheet: one table, then the details that matter.
The one table
| NSO | ISO | RSU | |
|---|---|---|---|
| What it is | Option to buy at a set strike price; anyone can receive one | Option to buy at a set strike price; employees only | Promise of shares on a vesting schedule |
| Tax at grant | None (if priced at fair market value) | None | None |
| Tax at vest | None | None | Ordinary income on full market value |
| Tax at exercise | Ordinary income on the spread + payroll taxes | No regular tax; spread is an AMT adjustment | — |
| Tax at sale | Capital gain/loss above exercise-date value | Long-term gain on entire gain — if both holding periods met | Capital gain/loss after vest |
| Payroll taxes | Yes | No | Yes, at vest |
| Withholding | At exercise | None | 22% federal (37% above $1M/yr) |
| Biggest trap | Cash for strike + tax before any sale | AMT on paper gains; early sale kills benefit | Tax on shares you may not be able to sell |
NSOs: taxed at exercise, no way around it
A non-qualified stock option (NSO) gives you the right to buy shares at a strike price, usually the fair market value on the grant date. There is no tax at grant. The taxable event is the exercise: the spread between the stock's value that day and your strike price is ordinary compensation income — on your W-2, with federal and state income tax withheld, plus Social Security and Medicare on the spread.
After exercise, your basis is the fair market value on the exercise date. Further appreciation is capital gain — long-term if you hold more than a year, short-term if you don't. NSOs have no holding periods and no AMT, and they can go to anyone: employees, advisors, contractors, board members. ISOs are employees only.
ISOs: the best deal, with the worst trap
Incentive stock options get preferential treatment under Section 422: no regular tax at grant or exercise. Hold the shares at least two years from grant and one year from exercise — a qualifying disposition — and your entire gain, strike price to sale price, is taxed as long-term capital gains (0%, 15%, or 20%) instead of ordinary rates up to 37%.
Two catches. The $100,000 rule: only $100,000 of grant-date value can first become exercisable in any calendar year; the excess is treated as an NSO. And the holding periods are strict — sell early and you have a disqualifying disposition: the spread at exercise (or your actual gain, if smaller) becomes ordinary income, and only the rest is capital gain. Same-day exercise-and-sale is always disqualifying.
Then the AMT. The exercise spread is a preference item for the Alternative Minimum Tax (26% or 28% above the exemption). Exercise, hold past year-end, and you can owe real tax on a paper gain — and if the stock falls, the tax does not. AMT paid can be recovered as a credit (Form 8801) when your regular tax exceeds your AMT, but it can take years to use up.
RSUs: the simplest, taxed at vest
A restricted stock unit is not an option and needs no exercise — a promise to deliver shares on a vesting schedule. When shares vest, their value that day is ordinary wage income on your W-2, subject to income and payroll taxes, exactly like a cash bonus.
Your employer withholds federal tax at the supplemental-wage rate: 22% up to $1 million a year, 37% above that. If your bracket is higher — 32%, 35%, or 37% in 2026 — you owe the difference in April, which is why RSU earners usually pay quarterly estimated taxes. After vest, your basis is the vest-date value and later movement is capital gain or loss. Double-trigger RSUs at private companies are not taxed until the second trigger, usually an IPO or acquisition.
The 2026 AMT numbers (they changed this year)
The One Big Beautiful Bill Act, signed in July 2025, reshaped the AMT starting in 2026 — not in ISO holders' favor. Exemptions stayed high and are now permanent, but the exemption phases out sooner and disappears twice as fast. In 2025 the phaseout started at $626,350 (single) / $1,252,700 (joint) at 25 cents per dollar; most older guides still quote those thresholds.
| 2026 AMT figure | Single | Married filing jointly |
|---|---|---|
| Exemption | $90,100 | $140,200 |
| Phaseout begins (AMT income) | $500,000 | $1,000,000 |
| Phaseout rate | 50¢ per $1 over | 50¢ per $1 over |
| Exemption fully gone | $680,200 | $1,280,400 |
| AMT rates | 26% up to $244,500 above the exemption; 28% above that | |
The scale: 10,000 ISO shares with a $10 strike, exercised at $60, create a $500,000 spread. At 2026 rates, the tentative AMT on that spread alone is roughly $135,000 before the exemption and your regular tax are netted out. You pay the higher of regular tax or AMT — but the order of magnitude is the point: five figures of tax, due in April, on shares you have not sold.
Same $100,000, three different tax bills
The numbers below are a simplified illustration, not anyone's real situation. They assume a 32% marginal federal rate and a 15% long-term capital gains rate, and ignore state tax.
| NSO | ISO (qualifying) | RSU | |
|---|---|---|---|
| Taxable event | $100,000 spread at exercise | None at exercise | $100,000 at vest |
| Federal tax | $32,000 ordinary, plus payroll taxes | $15,000 long-term capital gains at sale | $32,000 ordinary (only $22,000 withheld) |
| AMT risk | None | Yes | None |
The ISO saves about $17,000 versus the NSO on the same $100,000 — if you clear both holding periods and the AMT does not eat the savings. That "if" is doing a lot of work.
Where the 83(b) election fits
The 83(b) election changes when restricted stock is taxed — but not for the three types above the way people assume. It applies to restricted stock awards (RSAs) and shares from early-exercised options, where actual shares transfer subject to vesting. It does not apply to standard RSUs: a promise is not property, so there is nothing to elect on.
File within 30 calendar days of the grant or early exercise — weekends and holidays included, no extensions — and you pay ordinary tax on the grant-date value (often near zero for an early exercise at fair market value) instead of the value at each vest date. Your capital-gains clock starts at grant. The risks: the election is irrevocable, and if you forfeit the shares, the prepaid tax is gone. For early-exercised ISOs it also locks in the spread for AMT at exercise.
Which one should you want?
At a public company, you usually do not choose — RSUs are the standard grant, and their simplicity is a feature. The tax is automatic and the only decision is hold or sell after vest.
At an early-stage startup, ISOs are the prize if you can hold through both holding periods — but they demand planning: exercise in batches sized to stay under the AMT, exercise early in the year, and never exercise more than you could afford to pay tax on if the stock went to zero.
NSOs are the middle ground: ordinary income at exercise, but no AMT and no holding periods. Advisors and contractors get NSOs because the law does not allow ISOs for them.
Three mistakes to avoid
- Exercising ISOs in December and holding. You lock in the AMT with no time left to sell or harvest losses before April. Exercise early in the year.
- Selling ISO shares one month early. Missing either holding period by a day converts the spread to ordinary income. Mark the qualifying date when you exercise.
- Assuming RSU withholding covers the tax. At a 32% bracket, every $100,000 vested leaves a $10,000 April shortfall.
Make tax season boring
When your equity comp is simple — RSUs vested, taxes handled quarterly, documents in one place — tax software handles the return without drama. The complexity that sends people to a CPA comes from ISOs, early exercises, or multi-state situations. If you exercised ISOs this year, keep Form 3921: it documents the grant date, exercise date, and fair market value at exercise.
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NSO vs ISO vs RSU FAQ
When are NSOs taxed?
NSOs are taxed at exercise. The spread between the stock's fair market value on the exercise date and your strike price is ordinary income on your W-2, with income and payroll taxes withheld. Your basis becomes the exercise-date value; later appreciation is capital gain.
Do ISOs trigger tax when you exercise them?
Under regular tax rules, no. But the spread at exercise is an AMT adjustment, so you can owe AMT in the exercise year without selling any shares. Hold two years from grant and one year from exercise, and the entire gain is long-term capital gains on a qualifying disposition.
What is a disqualifying disposition of ISO shares?
Selling ISO shares before two years from grant and one year from exercise. The exercise-date spread (or your actual gain, if smaller) is taxed as ordinary income; only the rest is capital gain. You lose the ISO's main benefit.
Can you file an 83(b) election on RSUs?
No. An 83(b) election applies only to property actually transferred — restricted stock awards and shares from early-exercised options. A standard RSU is an unfunded promise, so there is no property to elect on. File within 30 calendar days; the election is irrevocable.
Which is better for taxes: NSO, ISO, or RSU?
ISOs have the best upside if you can hold through both holding periods and manage the AMT — the whole gain can be taxed at 0%, 15%, or 20% instead of up to 37%. RSUs are simplest, taxed once at vest. NSOs sit in between: ordinary income at exercise, no AMT, no holding periods.
The bottom line
NSOs tax the spread at exercise. ISOs defer the tax and can convert the whole gain to capital gains — if you survive the holding periods and the AMT. RSUs tax the value at vest and ask nothing of you. Know which letters are in your grant, mark the dates, and run the AMT math before you exercise — not after.