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Reading Your Equity Grant — RSUs, ISOs, NQSOs

Your equity grant uses one of three common structures, and each is taxed completely differently. Knowing which one you have changes how you plan vesting, sales, and exit timing.

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Your offer letter mentions equity. Somewhere in the grant documents — usually a PDF with 30+ pages — it tells you what kind of equity you actually have. The three most common structures (RSUs, ISOs, NQSOs) look similar on the surface but are taxed in very different ways. The structure determines when you owe taxes, how much, and what counts as a "good" decision when you sell.

The three structures at a glance

RSUs (Restricted Stock Units): A promise to deliver shares on a vesting schedule. When shares vest, you owe ordinary income tax on their full value — whether you sell or not. Most public-company grants are RSUs.

ISOs (Incentive Stock Options): The right to buy shares at a fixed price (the "strike price"). No tax when you exercise (unless AMT applies — see below). If you hold the shares for the right period after exercise, gains can be taxed at long-term capital gains rates. Common at early-stage startups.

NQSOs (Non-Qualified Stock Options): Like ISOs, but the tax treatment is less favorable. You owe ordinary income tax on the spread between strike price and fair market value when you exercise.

When each tax timing matters

For RSUs:

  • Tax is withheld at vest, usually by selling enough shares to cover the bill ("sell-to-cover"). The employer-default withholding rate is often below your actual marginal rate, so you may owe more at tax time.
  • If the stock price drops after vesting, you've paid ordinary income tax on a higher value than what you can now sell for.

For ISOs:

  • Exercising creates a potential Alternative Minimum Tax (AMT) event — the "bargain element" (FMV minus strike price) counts as AMT income, even though you owe no regular tax.
  • To get long-term capital gains treatment, you generally must hold the shares 2 years from grant and 1 year from exercise. This is the "qualifying disposition" rule.

For NQSOs:

  • Tax hits at exercise, not at vest. The spread is ordinary income, and the employer typically withholds.
  • Subsequent appreciation after exercise is taxed as capital gains.

When to consider professional tax advice

  • You're holding ISOs at a startup and considering early exercise.
  • You expect a large RSU vesting cliff (4-year cliff release or annual refresh stacking).
  • Your company just went public and you're deciding when to sell.
  • You're exercising NQSOs near year-end.

These situations can shift your tax bill by tens of thousands of dollars based on timing decisions. A CPA who specializes in equity compensation usually pays for themselves.

What to find in your grant documents

  • The structure (RSU, ISO, NQSO, or something else like RSAs or SARs).
  • The vesting schedule and cliff dates.
  • The strike price (for options) — and how it compares to the current 409A valuation.
  • The expiration date for options (usually 10 years from grant, but truncates fast if you leave the company — often only 90 days post-termination, unless your plan extends this).
  • Acceleration clauses in the event of acquisition, IPO, or termination without cause.

What to ask HR or legal

  • Does my company offer early exercise for ISOs? (Can dramatically reduce future AMT and start the long-term holding clock early.)
  • What's the post-termination exercise window if I leave?
  • Is the grant single-trigger or double-trigger for acceleration?
  • Can I get a copy of the most recent 409A valuation?

The IRS publishes guidance on stock options and RSUs — IRS Tax Topic 427 (Stock Options) (affiliate link — OffbookHR may earn a commission if you buy through this link. It does not affect ranking.).

This page reflects general information and is not tax, legal, or investment advice. Equity tax rules are complex and high-stakes — consult a CPA or attorney specializing in equity compensation before making decisions.