If you work in tech, you’ve probably seen RSUs (Restricted Stock Units) or stock options in your compensation package. Maybe you assumed they were the same thing—or thought, Great, free stock!—only to realize later that vesting, taxes, and selling strategies make a huge difference.
Both can be valuable, but they work very differently. If you don’t understand the difference between RSUs and stock options, how they’re taxed or when to sell, you could end up paying way more in taxes than necessary or missing out on potential gains.
Let’s break it all down, starting with what they even are.
First, What Are These Things?
Alright, let’s start with the basics. Both RSUs (Restricted Stock Units) and stock options are ways companies give employees ownership in the company. They’re meant to incentivize you to stick around and, hopefully, benefit if the company’s value goes up.
But they work in completely different ways.
Think of RSUs as a gift of stock—but with a catch. You don’t get the shares immediately. Instead, they vest over time, meaning you have to stay at the company for a certain period before they actually become yours. Once they do? Boom, you own them.
Stock options, on the other hand, are like a coupon for buying stock at a fixed price. You don’t get shares handed to you—you just get the right to buy them later at a set price, called the exercise price. If the stock price goes up, you can buy low and sell high for a profit. But if the stock price stays below your exercise price? Your options are worthless.
Here’s a quick analogy:
- RSUs are like getting a free concert ticket—once it’s yours, you can use it or sell it.
- Stock options are like a discount code for tickets—but if ticket prices don’t go up, your discount is useless.
How Do They Work?
Let’s say you’re joining a startup and they offer you 10,000 RSUs that vest over four years. That means, after your first year, you get 2,500 shares. Every year after that, you get another 2,500—until you’ve stayed the full four years and own all 10,000 shares.
Now let’s say, instead of RSUs, they offer you 10,000 stock options with an exercise price of $5 per share. You don’t actually own any shares yet, but you have the option to buy them for $5 once they vest.
If the company’s stock shoots up to $50 per share, you can buy at $5, sell at $50, and walk away with a big profit. But if the stock stays at $5 or drops below? Your options aren’t worth exercising.
This is why RSUs feel more guaranteed—they have value no matter what.
Stock options? Higher potential upside, but also more risk.
What Happens If Your Company IPOs?
Now, let’s talk about the fun (or stressful) part—what happens if your company goes public?
With RSUs, things are pretty straightforward. If they’ve already vested, you own the shares. If not, you’ll have to wait until they do. But here’s the catch: if your RSUs have double-trigger vesting, they don’t actually vest until your company IPOs and you stay employed for a certain period after. That means you could be waiting a while before you can cash out.
Stock options work differently. If you’ve already exercised your options, you’re in a great spot because you own the shares. You can sell them once trading restrictions are lifted (typically after a six-month lockup period). If you haven’t exercised yet, you might want to — so you can start the clock on long-term capital gains tax treatment (we’ll get into taxes next).
How Are They Taxed?
This is where things get tricky. The way RSUs and stock options are taxed is completely different, and messing this up can cost you a lot of money.
RSUs and Taxes
RSUs are the simplest to understand tax-wise because they’re taxed as ordinary income the moment they vest—just like a cash bonus.
Let’s say your company grants you 5,000 RSUs that vest over four years, and this year 1,250 shares vest. If the stock price at vesting is $100 per share, that’s $125,000 in taxable income for the year.
💡 Key thing to know: You owe taxes even if you don’t sell the shares right away.
So, what taxes do you pay on RSUs?
- Federal income tax: RSU income is taxed at your ordinary income tax rate (which could be as high as 37% for high earners).
- State and local tax: If you live in a high-tax state like California or New York, you could owe 10%+ more.
- Payroll taxes: RSUs are subject to Social Security (6.2%) and Medicare (1.45%)—and if you make over $200K, an additional 0.9% Medicare tax applies.
Most companies automatically withhold 22% for taxes by selling some of your shares. But this isn’t always enough—especially for high earners. If you’re in the 32% or 37% tax bracket, you could owe a big chunk of taxes at year-end.
When should you sell RSUs?
Because RSUs are taxed at vesting, many employees sell right away to avoid taking on unnecessary investment risk. However, if you believe your company’s stock price will rise, you can hold onto the shares—but just know that any increase in value will be taxed later as capital gains.
Stock Options and Taxes
Stock options have two taxable events:
- When you exercise the options (buy the shares).
- When you sell the shares.
The tricky part?
The type of tax you owe depends on whether you have NSOs (Non-Qualified Stock Options) or ISOs (Incentive Stock Options).
NSO Taxes: You Owe Ordinary Income Tax at Exercise
With NSOs, you owe ordinary income tax when you exercise—based on the difference between the exercise price and the stock’s fair market value.
Example:
- You have 5,000 NSOs with an exercise price of $5 per share.
- You exercise when the stock price is $50 per share.
- Your taxable income is: (50 – 5) × 5,000 = $225,000.
This $225K gets added to your salary and taxed at your regular income tax rate. Plus, you still owe capital gains tax later when you sell.
What if I don’t exercise my NSOs?
If you don’t exercise, you don’t owe any taxes yet. But NSOs expire—usually 90 days after leaving your company. So if you wait too long, you could lose them altogether.
ISO Taxes: Better Tax Treatment, But Beware of AMT
ISOs get special tax treatment, but they come with a catch: the Alternative Minimum Tax (AMT).
How ISOs are taxed:
- No regular income tax at exercise (unlike NSOs).
- If you hold the shares for at least 1 year after exercise and 2 years after grant, you qualify for long-term capital gains tax when you sell.
Sounds great, right? Well, here’s the catch: Even though ISOs aren’t taxed as ordinary income, they can trigger AMT at exercise.
How does AMT work?
AMT is a parallel tax system that kicks in if your adjusted income (including ISOs) passes a certain threshold.
AMT catches a lot of people off guard because it’s based on hidden income that doesn’t show up in your paycheck.
Example:
- You exercise 5,000 ISOs at $5 per share when the stock is worth $50.
- This creates $225,000 of AMT income.
- If you pass the AMT threshold (around $126K for single filers), you owe AMT now, even if you don’t sell the shares.
📌If you’re thinking about exercising ISOs, use our AMT Calculator to check if you might owe extra taxes before you make your move. Additionally, we strongly recommend engaging with a specialized tech financial advisor before making any big decisions.
What Happens When You Sell?
Once you own the shares, the next tax event happens when you sell them.
- If you sell immediately after exercising NSOs? You just owe ordinary income tax on the spread—no capital gains.
- If you sell after holding RSUs or stock options for a year? You qualify for lower long-term capital gains tax (0%, 15%, or 20%, depending on your income).
📌 Keep In Mind: Many tech employees try to hold shares at least a year to get long-term capital gains rates.
So Which One’s Better?
It depends on your situation.
- RSUs are great if you want guaranteed value and less risk. Even if your company’s stock price drops, RSUs still hold value.
- Stock options are great if you want more upside and are willing to take some risk. If your company stock takes off, stock options can be way more lucrative than RSUs.
A lot of early employees get stock options, while employees hired later tend to get RSUs. If you’re joining a company that’s already public, RSUs are more common. If you’re early at a startup, you’ll probably get stock options.
Final Thoughts: What Should You Do?
If you have RSUs, plan for the taxes and decide if you want to sell at vesting or hold onto the shares.
If you have stock options, be strategic about when you exercise—especially if your company is heading for an IPO.
The worst thing you can do with stock options or RSUs? Ignore the tax consequences.
A little planning goes a long way—and that’s where we can help.
At KB Financial Advisors, we specialize in helping tech employees navigate their stock compensation. If you’re unsure about when to exercise, when to sell, or how to manage taxes, let’s talk.
👉 Schedule a free consultation and let’s figure this out together.
