RSUs, ISOs, NSOs and ESPP shares can make up a large share of an executive's net worth, and each follows different tax rules. Mistakes here are common and expensive: under-withholding on RSUs, an alternative minimum tax surprise on ISOs, or holding too much company stock for too long. Here is a plain-English map.
In brief
- RSUs are taxed as ordinary income when they vest, and default withholding is often too low.
- NSOs are taxed as ordinary income on the spread when you exercise.
- ISOs can qualify for capital gains treatment but can trigger the alternative minimum tax.
- A written plan for selling, holding and diversifying beats deciding on each vest date.
Restricted stock units
When RSUs vest, their market value is wages, taxed as ordinary income and reported on your W-2. Employers commonly withhold federal tax at the 22% supplemental rate on the first $1 million of supplemental wages, and 37% above that. If your actual bracket is 32%, 35% or 37%, that gap can produce a large bill in April. Holding vested RSUs is economically the same as receiving cash and buying company stock with it. Many people would not make that purchase on purpose.
Non-qualified stock options
NSOs are taxed when you exercise: the difference between the market price and the exercise price is ordinary income. Later growth is capital gain. The decision is mostly about timing: when to exercise relative to your income in a given year, the option's expiration, and how much company exposure you already have.
Incentive stock options
ISOs are not taxed for regular income tax at exercise. If you hold the shares at least two years from grant and one year from exercise, the entire gain can be long-term capital gain. The catch is that the spread at exercise counts for the alternative minimum tax, which can create a tax bill with no cash to pay it. Sell too early and the gain becomes ordinary income. Many people exercise a measured amount each year to stay under their AMT threshold.
Employee stock purchase plans
Qualified ESPPs let you buy shares at a discount, often 15%. Holding periods determine how much of the gain is ordinary income versus capital gain. Many people sell soon after purchase to lock in the discount and avoid adding to their concentration.
Build a plan, not a habit
- Set a target for the maximum share of your net worth in company stock, including unvested awards.
- Decide in advance what you do at each vest or exercise, and consider a 10b5-1 plan if you are an insider.
- Run a tax projection before year end to size estimated payments or extra withholding.
- Coordinate ISO exercises, RSU sales and charitable gifts of appreciated shares in the same projection.
Published October 30, 2026. Based on federal tax law in effect as of that date. Plan terms vary by employer. Tax law can change, including retroactively.
This newsletter is for general educational purposes only. It is not a recommendation of any security, fund, or strategy, and it is not tax or legal advice. Viva Wealth Management and Cross Financial Advisors, LLC do not provide tax or legal advice. Consult your own CPA and attorney about your situation. All investing involves risk, including the loss of principal.