RSU vs ISO vs NSO Equity Comparison
RSUs taxed at vest as ordinary income. ISOs qualify for capital gains if held 2yr from grant + 1yr from exercise (AMT trap). NSOs taxed at exercise. This compares all three.
| RSU total tax | — |
| ISO total tax (LTCG only) | — |
| NSO total tax | — |
| Best vehicle | — |
Three main equity vehicles: RSUs (Restricted Stock Units, taxed at vest), ISOs (Incentive Stock Options, qualified for LTCG + AMT trap), NSOs (Non-Qualified Options, spread taxed at exercise). Tax treatment diverges sharply.
RSU Tax Mechanics
At vest: full FMV taxed as ordinary income, W-2 wages. Employer typically withholds shares to cover taxes (sell-to-cover or share-withholding). After vest, you own shares with basis = FMV at vest. Future gain/loss is capital gain/loss.
ISO Tax Mechanics + AMT Trap
At grant: no tax. At exercise: no regular tax BUT AMT triggers on (FMV − strike). If qualifying hold (2yr from grant, 1yr from exercise), entire gain is LTCG. Disqualifying disposition = ordinary income on spread at exercise. Plan AMT carefully — exercise + same-year sale avoids AMT.
NSO Tax Mechanics
At grant: no tax. At exercise: spread (FMV − strike) is ordinary income, W-2 wages. Future appreciation is LTCG. No qualifying hold required. Simpler than ISO but less tax-efficient at long hold.
Strategic Comparisons
RSU: zero downside risk, full upside, but max ordinary income. ISO: best LTCG outcome with proper holding, but AMT risk. NSO: better than RSU if held long after exercise (most appreciation as LTCG vs RSU partial).
Last updated May 2026. Sources: IRS Pub 525, IRS ISO Form 3921.