Stock Options vs Restricted Stock and RSUs: What Changes for Your Taxes

By Kevin Luu, Co-Founder and Chief Learning Officer. Reviewed on 2026-09-30.

The difference between restricted stock and stock options comes down to what you hold and what you pay. Restricted stock (and its close cousin, the restricted stock unit or RSU) gives you shares at little or no cost: RSU shares are delivered when they vest, and restricted stock is yours at grant but can be forfeited until it vests. Either way it keeps value as long as the stock is worth anything. A stock option gives you only the right to buy shares at a fixed strike price, so you must pay to exercise, and it is worth nothing if the stock trades below that price.

The tax timing also differs. RSUs are taxed as wages when shares are delivered at vest. Options are taxed when you exercise (nonqualified options) or, for incentive stock options (ISOs), possibly only when you sell, with an alternative minimum tax (AMT) question in between. For a California or Washington household already earning $750,000 or more, those timing differences decide how much of each grant you actually keep.

Three kinds of equity, side by side

People use “restricted stock” loosely. There are really three instruments, and offer letters at public tech and biotech companies, pre-IPO startups and academic spinouts mix them.

A common error, including in older guides, is advice to “file an 83(b) for your RSUs.” That is not possible. Under Treasury Regulation §1.83-3(e), an RSU is an unfunded promise, not property, until shares are delivered. The 83(b) election applies to restricted stock and early-exercised options, and the written statement must be filed with the IRS no later than 30 days after the shares are transferred (IRS Publication 525). Our guide to drafting a Section 83(b) election covers the mechanics.

Restricted stock vs RSUs: the difference that matters for taxes

With restricted stock, you own the shares from day one. They are just subject to forfeiture. That ownership is why the 83(b) election exists: you can choose to pay ordinary income tax on today’s value (often very low at an early-stage company) and start your capital gains holding period now. If the company grows, all later growth can be capital gain. If you leave before vesting or the company fails, you generally cannot get that tax back.

With RSUs, nothing is yours until delivery. The full value of the shares on the delivery date is wages on your W-2. Your employer withholds federal tax at a 22% supplemental rate (or uses the aggregate method), rising to a mandatory 37% on supplemental wages above $1,000,000 in the calendar year, per IRS Publication 15 for 2026. Your cost basis in the shares is their value at vest, so if you sell right away there is little or no further gain.

How stock options are taxed: NSOs vs ISOs

Nonqualified stock options (NSOs)

When you exercise an NSO, the spread (market price minus strike price, times shares) is wages, taxed exactly like an RSU vest. You also pay the strike price in cash, unless you do a cashless or sell-to-cover exercise. Any later rise in value is capital gain. Our article on tax on cashless exercise walks through that option.

Incentive stock options (ISOs)

ISOs have no regular income tax at exercise. If you hold the shares at least two years from grant and one year from exercise (IRC §422(a); IRS Publication 525), the whole gain over the strike is federal long-term capital gain when you sell. Three catches:

• AMT. The spread at exercise counts as income for the alternative minimum tax. For 2026 the joint-filer AMT exemption is $140,200 and starts phasing out at $1,000,000 of AMT income, at 50 cents per dollar (Rev. Proc. 2025-32; P.L. 119-21). At our readers’ incomes, a large ISO exercise can push AMT income past that threshold, where the exemption shrinks fast.
• The $100,000 rule. ISOs that first become exercisable in one calendar year above $100,000 of stock, valued at grant-date fair market value, are treated as NSOs (IRC §422(d)). Senior hires often find part of a “big ISO grant” is really NSOs.
• Leaving the company. To keep ISO treatment, options generally must be exercised within three months of leaving employment (§422(a)(2)); Publication 525 notes exceptions for disability and death. After that they become NSOs if the plan still allows exercise.

California vs Washington: same grant, different bill

California taxes RSU income, NSO spreads and capital gains the same way: as ordinary income. The state has no lower rate for capital gains, so holding ISO shares for a year saves federal tax but not state tax. The top 2025 rate is 13.3% (12.3% plus a 1% Behavioral Health Services Tax on taxable income over $1,000,000), per the FTB 2025 rate schedules; the FTB had not published 2026 schedules as of this review. Wages, including RSU vests and NSO spreads, also carry California SDI at 1.3% for 2026 with no wage cap (EDD).

Washington does not tax wages today, so an RSU vest or NSO exercise carries no state income tax. Gains on shares you sell later can fall under Washington’s capital gains tax: 7% on long-term gains above the standard deduction ($278,000 for 2025, the latest published) and 9.9% on taxable gains above $1,000,000 (WA DOR). That makes a long-held ISO position a Washington tax question too. Washington has also enacted a 9.9% income tax on individuals and joint filers with AGI over $1,000,000, starting January 1, 2028 (WA DOR), so families planning multi-year exercises should watch that date.

Worked example: an $800,000 California household

Assumptions (illustrative): a married couple in San Mateo County filing jointly. One spouse is a biotech scientist with $400,000 salary; the other is a physician with $250,000 salary. Together that is $650,000 of base W-2 pay, with the standard deduction of $32,200 for 2026 (we assume no larger itemized deductions). The scientist’s company offers a choice for next year’s refresh grant worth about $150,000: RSUs, or options.

Option A: $150,000 of RSUs vest

• Total W-2 income rises to $800,000. Federal taxable income is about $767,800, still inside the 35% bracket for 2026 (which runs from $512,450 to $768,700).
• Federal income tax on the $150,000: about $52,500 (35%).
• Payroll tax: the scientist is already past the 2026 Social Security wage base of $184,500, so no more 6.2%. Medicare of 1.45% plus the 0.9% Additional Medicare Tax adds about $3,525. California SDI at 1.3% adds $1,950.
• California income tax: this slice falls in the 9.3% and 10.3% brackets (2025 schedules), about $14,500 depending on the family’s California deductions.
• Total: roughly $72,500 of the $150,000, about 48%.

The trap is withholding. At the 22% federal supplemental rate, the employer withholds $33,000 of federal tax against about $52,500 owed, leaving a federal shortfall near $19,500 at filing unless the family adjusts estimated payments. Our guide on withhold to cover vs sell to cover covers how to close that gap.

Option B: options on the same value

Suppose the alternative is 5,000 NSOs with a $70 strike, granted when the stock trades at $70. The RSU version of the same $150,000 grant would be about 2,143 shares. Here is what each is worth at exercise or vest, before tax:

The option spread is taxed the same way as the RSU income above, and the family must also pay the strike ($350,000 for 5,000 options) in cash or sell shares to cover it. Options win only if the stock rises a lot; RSUs win in every flat or modest outcome.

The same grant as ISOs would carry no regular tax at exercise, but a $150,000 spread would add to AMT income, and in California the eventual gain is still taxed at ordinary rates. The family pays the strike price in cash either way, and that cash sits in one stock for at least a year if they want the ISO benefit.

The decision for a delegator family

For families who do not want to manage equity as a second job, a few questions settle most choices:

1. How much of your net worth is already in this one stock? If vested shares and unvested grants are a large share of the family balance sheet, RSUs and prompt selling reduce risk; options add leverage to the same bet.
2. Can you fund an exercise without touching the emergency reserve or 529 plans? Options and early-exercised restricted stock require cash up front. RSUs do not.
3. Is the company public? Private-company options and RSUs can be hard to sell. See RSUs at private companies.
4. Do you live in California or Washington? The ISO holding-period benefit is mostly federal in California; in Washington it interacts with the capital gains tax and, from 2028, the new income tax above $1,000,000 of AGI.

Common mistakes we see

• Treating 22% withholding as the tax owed. At the 35% and 37% federal brackets it rarely is.
• Exercising ISOs late in the year without modeling AMT first.
• Letting ISOs lapse into NSOs, or expire, after a job change because nobody tracked the three-month window.
• Holding vested RSUs “to save tax.” The tax was paid at vest; holding is a new investment decision in a single stock.
• Filing (or believing you can file) an 83(b) election for RSUs.

What to write down for your kids

Equity grants are some of the largest money decisions these families make, and children usually see only the outcome: a bigger house, a delayed sabbatical, a tuition fund. A one-page note on why you sold at vest, or why you held options through a downturn, gives them the reasoning. It also keeps your spouse and your future self from repeating a costly mistake. As Kevin Luu puts it: “Your kids don’t need to inherit your portfolio. They need to inherit your decision-making process.”

Frequently asked questions

Are RSUs stock options?

No. An RSU is a promise to deliver shares at vest with nothing to pay, and it is taxed as wages on delivery. A stock option is a right to buy shares at a set strike price. You choose when to exercise (within the plan’s deadline), you pay the strike, and the option is worthless if the stock stays below that price.

What is the difference between ISOs and RSUs?

RSUs are taxed as ordinary income when shares are delivered, at no cost to you. ISOs cost the strike price to exercise and avoid regular income tax at exercise, but the spread counts for AMT. If you hold ISO shares two years from grant and one year from exercise, the gain is federal long-term capital gain. California still taxes it as ordinary income.

Is control stock the same as restricted stock?

No. In securities law, “control securities” are shares held by an affiliate of the company, such as an officer, director or major holder, and “restricted securities” are shares acquired in an unregistered offering. Both are resold under SEC Rule 144. Neither term means the same thing as compensation restricted stock that is subject to vesting, although the same shares can be both.

Next step

Before your next refresh grant or exercise window, list every grant you hold, its type, vest dates and expiration dates on one page, and estimate the tax gap between withholding and your bracket. If you want a second set of eyes on how it fits your taxes and your concentration in one stock, our tax management and investment risk management teams at Age Five Family Office™ can review it as part of a Tax & Wealth Assessment.

This article is general education, not individual tax advice. The right move depends on the family’s full picture.

Written by

Kevin Luu

Co-Founder and Chief Learning Officer, Bright Advisers

Kevin has advised high-income W-2 tech and biotech families since 2015, and leads the education-first Age Five Family Office from Brea, California.

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