RSU vs stock options: how are they taxed differently in 2025?

RSUs (Restricted Stock Units) and stock options have fundamentally different tax treatment. Understanding the differences can save you thousands in taxes.

RSUs (Restricted Stock Units):

• Taxed as ordinary income when they vest. Your employer withholds taxes and reports the income on your W-2.
• The taxable amount is the fair market value (FMV) of the shares on the vesting date.
• Your cost basis for future sales is the FMV at vesting. Any subsequent gain or loss is a capital gain/loss (short-term if sold within 1 year of vesting, long-term if held longer).
• There are no decisions to make at grant; tax hits automatically at vesting.

Non-Qualified Stock Options (NSOs/NQSOs):

• No tax at grant. Taxed as ordinary income when exercised on the "spread" (FMV at exercise minus exercise price).
• The spread is reported on your W-2 and subject to income and payroll taxes.
• Your cost basis is the FMV at exercise. Subsequent gains/losses are capital gains.
• You choose when to exercise, giving you timing flexibility.

Incentive Stock Options (ISOs):

• No ordinary income tax at exercise (but the spread is an AMT preference item that may trigger Alternative Minimum Tax).
• If you hold shares for 1+ year after exercise AND 2+ years after grant date, the entire gain from exercise price to sale price is taxed as long-term capital gains. This is the qualifying disposition.
• If you sell before meeting both holding periods (disqualifying disposition), the spread at exercise is taxed as ordinary income.
• ISOs have a $100,000 annual vesting limit; amounts above that are treated as NSOs.

Strategy tip: For ISOs, run AMT calculations before exercising. In a year with low other income, you may be able to exercise ISOs without triggering AMT. Consider exercising early in the year to start the holding period clock sooner.