The Short Answer

Planning around stock options and RSUs starts with understanding what you own, restricted stock units (RSUs), nonqualified stock options (NSOs), incentive stock options (ISOs), or employee stock purchase plan shares, and how each is taxed. From there, a plan considers when to exercise options, how to manage tax withholding gaps, how much company stock to retain, and how equity fits into your broader goals. Because equity awards can quickly lead to a concentrated position and significant tax events, decisions made without a plan can be costly.

How Are Restricted Stock Units Taxed?

RSUs are a promise to deliver company shares once vesting conditions are met. When RSUs vest, the fair market value of the shares is taxed as ordinary income and typically reported on your W-2. Employers usually withhold taxes by retaining some shares, but federal supplemental withholding rates may be lower than your actual marginal rate, which can leave a balance due when you file.

After vesting, any further gain or loss is a capital gain or loss, with the holding period beginning at vesting. Because RSUs have already been taxed at vesting, many advisers suggest asking a simple question: if you received this amount in cash, would you buy this much of your company’s stock? If not, selling some or all vested shares may be worth considering.

How Are Nonqualified Stock Options Taxed?

NSOs give you the right to buy company stock at a set exercise price. When you exercise, the difference between the market price and the exercise price, known as the bargain element, is taxed as ordinary income. Subsequent appreciation is taxed as a capital gain when you sell.

Key planning questions include when to exercise relative to the option’s expiration date, how to fund the exercise and the tax, and whether to hold or sell the shares afterward.

How Are Incentive Stock Options Taxed?

ISOs can receive more favorable tax treatment. Generally, no regular income tax is due at exercise, and if you hold the shares for at least two years from the grant date and one year from exercise, the entire gain may be taxed at long-term capital gains rates.

However, the bargain element at exercise may be subject to the alternative minimum tax (AMT). Exercising a large number of ISOs can create a significant AMT liability even if you have not sold the shares. If the stock price later declines, you may owe tax on value you never realized. Modeling the AMT impact before exercising is essential.

What Are Common Equity Compensation Planning Mistakes?

  • Allowing concentration to build: Regular vesting can steadily increase your exposure to a single company, which also provides your salary.
  • Underestimating taxes: Withholding on RSUs and NSOs may not cover the full liability.
  • Letting options expire: Options typically expire ten years after grant, or sooner after leaving the company.
  • Making decisions based on taxes alone: Holding shares to achieve favorable tax treatment may expose you to significant price risk.
  • Ignoring trading restrictions: Blackout periods and insider trading rules can limit when you can sell.

How Can Executives Build a Plan?

An effective plan typically includes an inventory of all grants with vesting and expiration dates, a target maximum allocation to company stock, a tax projection for upcoming vesting and exercise decisions, and a systematic approach to selling and diversifying. Executives subject to trading restrictions may use a Rule 10b5-1 plan to establish sales in advance.

Equity compensation should also be integrated with broader planning. Proceeds can fund goals such as retirement, education, or charitable giving. Donating appreciated shares can be an efficient way to support causes while reducing concentration. Our resource on managing concentrated stock risk discusses additional strategies.

The Takeaway

Equity compensation can be a powerful wealth-building tool when managed thoughtfully. Understanding how each award type is taxed, anticipating tax liabilities, and diversifying in a disciplined way can help you capture its value while managing risk. Newport works with business owners and executives and partners with their professional advisors on tax and estate planning; our private wealth team can help you consider how equity awards fit within your broader plan. If your employer also offers a nonqualified deferred compensation plan, Newport has written about how the 2026 Roth catch-up rule affects these plans.

This article is provided for educational purposes only and is not individualized investment, tax, or legal advice. Please consult qualified professionals about your specific circumstances and review our disclosures.