Stock Options vs RSUs: The Difference and How Each Is Taxed

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

The difference between stock options and RSUs comes down to what you are given. An RSU (restricted stock unit) is a promise to deliver shares when they vest, at no cost to you, and the full value is taxed as wages on the vest date. A stock option is the right to buy shares later at a fixed strike price, so it is worth only the gap between the market price and that strike, and the tax depends on whether it is a nonqualified option (NSO) or an incentive stock option (ISO).

Put simply: an RSU is worth something as long as the stock is worth more than zero. An option is only worth something if the stock rises above the strike. For a household earning $750,000 to $3 million in California or Washington, that difference shapes how much tax comes due, when you need cash, and how much of your net worth ends up tied to one employer.

RSUs vs stock options at a glance

RSUs have no strike price (more on that in Do RSUs Have a Strike Price?). Large public employers, including many big tech, biotech and pharma companies, commonly grant RSUs to most of their staff. Options are more common at earlier-stage companies and in some executive packages.

How RSUs are taxed at vest

When an RSU vests and the shares are delivered, the market value of those shares is wages. It shows up on your W-2, and federal income tax, Social Security (until the $184,500 wage base for 2026), Medicare and state payroll taxes all apply. RSUs are not “property” for tax purposes until the shares are delivered, so a Section 83(b) election is not available for them (Treas. Reg. §1.83-3(e)). That election applies to restricted stock and early-exercised options, not RSUs.

After vest, your cost basis is the value that was taxed. Any further gain or loss is a capital gain or loss: short-term if you sell within a year, long-term after more than a year.

Employers usually withhold federal tax on vesting shares at the 22% optional flat supplemental rate for 2026, and must use 37% on supplemental wages above $1,000,000 in the calendar year (IRS Publication 15). In a 35% or 37% bracket, 22% withholding usually leaves a balance due. See Do RSUs Count as Income? and withhold to cover vs sell to cover for the mechanics.

How stock options are taxed: NSOs vs ISOs

NSOs

With a nonqualified option, nothing is taxed at grant. When you exercise, the spread (market value minus the strike price you pay) is included in income and treated as wages (IRS Topic 427). After that it behaves like an RSU share: your basis is the strike plus the taxed spread, and later growth is a capital gain. Our guide to tax on cashless exercise covers what happens when you exercise and sell at once.

ISOs

With an incentive stock option, you generally owe no regular income tax at grant or exercise, but the spread at exercise can trigger alternative minimum tax (AMT) that year (IRS Topic 427). If you hold the shares more than two years from grant and more than one year from exercise, the whole gain over the strike is long-term capital gain (IRC §422(a)(1)). Sell earlier and part of it becomes ordinary income. Only $100,000 of ISOs (by grant-date value) can first become exercisable in any calendar year; the rest are treated as NSOs (IRC §422(d)).

AMT matters at this income level in a specific way. For 2026 the joint AMT exemption is $140,200, but it phases out by 50 cents per dollar of AMT income above $1,000,000 and is gone at $1,280,400 (Rev. Proc. 2025-32). A $1.2 million household that exercises ISOs with a large spread can owe AMT it never saw before. The calculation has to be run before the exercise, not discovered in April.

Worked example: the same $100,000 in California and Washington

Assumptions (illustrative): a married couple filing jointly with $1.2 million of W-2 income, both earners already past the Social Security wage base, in the 37% federal bracket for 2026 (over $768,700 of taxable income). In California, assume their state taxable income falls in the 11.3% bracket (2025 schedule, $891,542 to $1,485,906, since 2026 brackets are not yet published) and is above $1,000,000, so the 1% Behavioral Health Services Tax also applies, for a 12.3% marginal state rate (FTB 2025 rate schedules).

Scenario A: $100,000 of RSUs vest

• Federal income tax at 37%: $37,000
• Medicare 1.45% plus 0.9% Additional Medicare Tax: $2,350
• California: 11.3% income tax plus the 1% Behavioral Health Services Tax ($12,300), plus 1.3% SDI on all wages for 2026 ($1,300)
• California total: about $52,950. Federal withholding at 22% covers only $22,000 of the $37,000 federal bill, leaving about $15,000 to pay in April or through estimates.
• Washington total: about $39,930 (federal $37,000, Medicare $2,350, WA Cares 0.58% $580). Washington has no wage income tax in 2026.

Scenario B: NSOs with a $100,000 spread

Say 2,000 NSOs with a $50 strike, exercised when the stock is $100. The spread is $100,000, taxed the same way as Scenario A. The difference: you also need $100,000 of cash for the strike (or a cashless exercise that sells shares to cover it). The tax result is the same; the cash flow is not.

Scenario C: ISOs, held for a qualifying sale

Same 2,000 ISOs, exercised at $100 and sold later at $100 after meeting the holding periods. The $100,000 gain is long-term capital gain. Federally, that is 20% plus the 3.8% Net Investment Income Tax for a joint return in this range for 2026, or $23,800, versus $39,350 of federal income and Medicare tax on the same amount as wages. That gap is the reason ISOs get attention.

California changes the picture. It has no lower rate for capital gains (FTB), so the 12.3% state rate (11.3% plus the 1% tax on income over $1,000,000) applies either way; the California saving comes only from skipping SDI. Washington residents avoid wage-level taxes but face the state’s 7% capital gains tax on long-term gains above the annual standard deduction ($278,000 for 2025, the latest published figure, per WA DOR). And the qualifying sale only pays off if the stock has not fallen during the required holding period, while AMT may already have been paid on the exercise-date spread.

If the stock drops

Take the same company, now trading at $45. 2,000 RSUs are still worth $90,000. 2,000 options with a $50 strike are worth nothing until the price recovers. This is why companies typically grant fewer RSUs than options for the same target value, and why “are RSUs better than stock options” has no single answer. RSUs trade upside for certainty. Options trade certainty for leverage on the share price.

The decision a family actually has to make

Most W-2 families do not choose between the two; the employer does. The real decisions are these:

1. RSUs: hold or sell at vest. Holding a vested RSU is economically the same as taking the cash and buying your employer’s stock with it. If you would not buy that much with cash, selling at vest is the default worth testing first.
2. Options: when to exercise. NSOs are usually exercised when you are ready to sell or near expiry. ISOs involve an AMT projection and a view on whether you can carry the risk of holding for more than a year.
3. Cash for April. Under-withholding on a large vest or exercise is the most common surprise at this income. Set aside the gap between 22% and your real marginal rate.
4. Concentration. When one employer pays your salary, your bonus and a large share of your net worth, a single bad year hits all three. See our investment risk management work for how families set a target and sell down on a schedule.

Common mistakes we see

• Filing an 83(b) election for RSUs. It does not apply to them.
• Assuming the 22% withheld at vest is the tax owed.
• Exercising ISOs and holding the shares past year-end without modeling AMT, then watching the stock fall and owing AMT on an exercise-date spread that no longer exists.
• Counting on long-term capital gain rates in California, which taxes gains as ordinary income.
• Telling a Washington household “there is no state income tax” without noting the 9.9% income tax Washington has enacted from 2028 for individuals and joint filers with AGI over $1,000,000 (WA DOR).

What to write down for your kids

Equity pay is often the largest single source of wealth in these families, and the reasoning behind each sale disappears fastest. A one-page note per grant, saying why you sold or held, what tax you expected and what you would do differently, becomes a record your children can read later. As Kevin Luu puts it: “Your kids don’t need to inherit your portfolio. They need to inherit your decision-making process.” Our family governance work and the FamilyKnowledge® Library are built around exactly this kind of record.

Frequently asked questions

Are RSUs taxed as ordinary income or capital gains?

Both, at different times. The value at vest is ordinary wage income, reported on your W-2 and subject to payroll taxes. Any change in value after vest is a capital gain or loss when you sell: short-term if you held the shares a year or less, long-term if you held them more than a year. In California both are taxed at the same state income tax rates.

Are stock options taxed as capital gains?

NSOs are not, at exercise: the spread is wages. Only growth after exercise is capital gain. ISOs can be: if you hold the shares more than two years from grant and more than one year from exercise, the full gain over the strike is long-term capital gain, though the exercise may trigger AMT. Sell sooner and part of the gain is ordinary income.

Are RSUs the same as stock options?

No. An RSU delivers shares at vest with nothing to pay. An option gives you the right to buy at a set price, and you choose when to exercise. Many people see both on one equity portal, which causes the confusion. The tax, the cash needed and the risk if the stock falls are all different. For RSUs vs owning shares outright, see RSU vs Common Stock.

Next step

Pull your latest equity statement and list each grant as RSU, NSO or ISO, with its vest dates and strike price where there is one. That list is what any tax projection starts from. If you want help turning it into a sale and tax plan, our tax management team runs this as part of the Tax & Wealth Assessment.

This is general education, and the right move depends on your 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.

Connect on LinkedIn →  · About Kevin