Your company stock can be one of the most valuable parts of your compensation. But how much you actually keep when you sell depends heavily on taxes. Whether you’re holding stock options, RSUs, or restricted stock awards, understanding the basics of long-term vs. short-term gains, cost basis, and holding periods is essential to making the most of your equity. Depending on your individual situation, one or more of the following terms may apply.
This guide breaks down the tax rules for the most common types of equity compensation: Incentive Stock Options (ISOs), Non-Qualified Stock Options (NSOs), Restricted Stock Units (RSUs), and Restricted Stock Awards (RSAs).
Long-Term vs. Short-Term Gains: Why Holding Periods Matter
When you sell shares for more than what you paid (your cost basis), the profit is called a capital gain. How much tax you owe depends on how long you’ve held the shares:
- Long-Term Capital Gains: If you’ve held your shares for more than one year before selling, your profits qualify for long-term treatment, which can mean lower tax rates (0–20%) depending on your income.
- Short-Term Capital Gains: If you sell shares within one year of acquiring them, your gains are taxed as ordinary income, which is often much higher.
The one-year mark is the dividing line that makes the biggest difference in tax planning.
Taxes on Stock Options (ISOs vs. NSOs)
What Are ISOs and NSOs?
A stock option gives you the right to buy shares of your company at a fixed “strike price.” The two main types are:
- Non-Qualified Stock Options (NSOs): Straightforward tax rules, taxed as income when exercised.
- Incentive Stock Options (ISOs): Special tax advantages if certain holding rules are met, but more complex because of the Alternative Minimum Tax (AMT).
Intrinsic Value
The intrinsic value is the “paper profit” when you exercise—the difference between the stock’s fair market value (FMV) and your strike price.
- NSOs: This value is taxed as ordinary income in the year of exercise, and it shows up on your Form W-2.
- ISOs: No ordinary income at exercise, but the spread counts toward the AMT, which may trigger a tax bill.
Cost Basis
Your cost basis is what the IRS uses to measure your gain (sale price minus cost basis = taxable gain).
- NSOs: Because you already paid ordinary income tax at exercise, your cost basis is the FMV on the day you exercised.
- ISOs: If you meet the special holding rules, your cost basis is your strike price.
Holding Periods for Options
The holding period for both ISOs and NSOs begins the day you exercise.
- NSOs: Standard one-year rule for long-term gains applies.
- ISOs: To qualify for the full tax benefit, you must hold shares at least one year after exercise and two years after the grant date.
Taxes on Restricted Stock Units (RSUs)
What Are RSUs?
RSUs are stock grants you don’t pay for. Instead, your company delivers shares once you meet vesting requirements.
Intrinsic Value and Taxation
When RSUs vest, the market value of those shares counts as ordinary income—no matter if you sell them right away or not. That income appears on your W-2 and is subject to payroll taxes.
This can create a cash flow challenge: you owe taxes at vesting, even if you don’t sell the shares.
Cost Basis for RSUs
Your cost basis is the FMV at vesting (since you paid income tax on that value). Any future profit or loss comes from the difference between that FMV and the eventual sale price.
Holding Periods for RSUs
The capital gains clock starts on vesting day. Hold the shares over one year after vesting to qualify for long-term rates when you sell.
Taxes on Restricted Stock Awards (RSAs)
What Are RSAs?
RSAs are actual shares granted to you up front, typically subject to a vesting schedule. Unlike RSUs, you own the shares immediately—but if you leave the company before vesting, they can be forfeited.
Taxation Without an 83(b) Election
If you don’t make any special elections, you’ll pay ordinary income tax on the FMV of the shares as they vest, similar to RSUs.
The 83(b) Election: A Critical Choice
With RSAs, you have the option to file an 83(b) election with the IRS within 30 days of receiving the grant. This election allows you to:
- Pay ordinary income tax up front on the current FMV of the unvested shares.
- Lock in that FMV as your cost basis.
- Start the capital gains holding period immediately.
If the shares appreciate significantly, the 83(b) election may save substantial taxes by converting what would have been ordinary income into long-term capital gains.
⚠️ Risk: If you file an 83(b) and later forfeit unvested shares, you don’t get a refund on taxes already paid.
Summary Table: Comparing NSOs, ISOs, RSUs, and RSAs
| Equity Type | Tax at Exercise/Vest | Cost Basis | Holding Period Starts | Special Rules |
| NSO | Ordinary income on the “spread” (FMV – strike) | FMV at exercise | Day of exercise | — |
| ISO | No regular tax, but spread counts for AMT | Strike price (if rules met) | Day of exercise | Must hold 1 yr after exercise & 2 yrs after grant for favorable treatment |
| RSU | Ordinary income on FMV at vest | FMV at vest | Day of vest | — |
| RSA | Ordinary income on FMV at vest (unless 83(b) filed) | FMV at vest, or strike if 83(b) | Day of vest, or grant date if 83(b) | 83(b) election can accelerate taxation and holding period |
Which Shares Should You Sell First?
When deciding which shares to sell, taxes are just one part of the picture. A general framework of possible options:
- Prioritize shares that qualify for long-term capital gains (likely a lower tax rate).
- Next, consider shares that would trigger short-term gains if selling fits your financial needs.
- Balance tax efficiency with diversification, cash flow needs, and your outlook on the company.
When to Talk to an Advisor
Equity taxes can get complicated – especially with ISOs, RSAs, and 83(b) elections. A financial advisor or tax professional can help you:
- Model out tax consequences before selling.
- Build a selling strategy that balances taxes with financial goals.
- Explore advanced strategies like 83(b) elections, Qualified Small Business Stock (QSBS), or trusts.
Key Takeaways
- Long-term vs. short-term treatment can dramatically change your tax bill.
- ISOs, NSOs, RSUs, and RSAs each follow different rules for cost basis, exercise/vesting, and holding periods.
- RSAs come with a unique decision point: the 83(b) election, which can create big tax savings—or risks.
- Professional advice is often worth it when navigating equity compensation.
