Tax Planning for Stock Options and RSUs

Equity Compensation Is a Tax Planning Challenge

Stock options and restricted stock units (RSUs) are powerful wealth-building tools, but they come with tax complexities that can cost you tens of thousands of dollars if handled poorly. The timing of when you exercise options, sell shares, and plan around vesting events can dramatically change your tax outcome.

This guide covers the strategic tax planning decisions for each type of equity compensation, not just the basic mechanics.

Incentive Stock Options (ISOs): Tax Planning Strategies

How ISOs Are Taxed: Quick Review

At grant: No tax

At exercise: No regular income tax, but the spread (fair market value minus exercise price) is an AMT adjustment

At sale (qualifying disposition): Long-term capital gains on the total gain from exercise price to sale price

At sale (disqualifying disposition): Ordinary income on the spread at exercise, capital gains on any additional appreciation

A qualifying disposition requires holding shares for at least one year after exercise AND two years after the grant date.

Strategy 1: Exercise Early When the Spread Is Small

The AMT risk from ISOs comes from the spread at exercise. If you exercise shortly after your options are granted (when the stock price is close to the exercise price), the AMT adjustment is minimal or zero. This lets you start the clock on the one-year holding period for qualifying disposition treatment without AMT consequences.

Example: Your ISOs have an exercise price of $10 and the current stock price is $12. Exercising now creates a $2 per share AMT adjustment. If you wait until the stock is $50, the adjustment is $40 per share, which could trigger thousands in AMT.

Strategy 2: Calculate the AMT Crossover Point

Before exercising, calculate exactly how many shares you can exercise without triggering AMT. This requires modeling your entire tax situation for the year. The AMT exemption for 2025 is approximately $88,100 (single) or $137,000 (married filing jointly). Exercise only enough shares to stay below the AMT threshold.

Strategy 3: Time Exercises Across Multiple Years

Instead of exercising all your vested ISOs in one year, spread exercises across two or more tax years. This keeps each year's AMT adjustment manageable and may keep you below the AMT exemption.

Strategy 4: Disqualifying Disposition Can Be Better

Counterintuitively, a disqualifying disposition (selling before meeting the holding requirements) sometimes results in lower total tax than a qualifying disposition. This happens when:

The stock price has dropped significantly from the exercise price

The AMT paid at exercise exceeds the capital gains tax savings from a qualifying disposition

You need the AMT credit carryforward, which ties up money for years

Run the numbers both ways before deciding. Use the stock sale tax calculator to compare outcomes.

Strategy 5: Use the AMT Credit Carryforward

If you paid AMT due to ISO exercises, you receive an AMT credit that carries forward to future years. This credit can offset regular tax in years when you do not have AMT. Track your AMT credit carryforward carefully and factor it into multi-year tax planning.

Non-Qualified Stock Options (NSOs): Tax Planning Strategies

How NSOs Are Taxed: Quick Review

At grant: No tax

At exercise: Ordinary income on the spread (FMV minus exercise price), subject to income tax and payroll taxes

At sale: Capital gains or loss from the FMV at exercise to the sale price

Strategy 1: Time Exercises to Manage Brackets

NSO exercises create ordinary income. If you exercise a large block of options, you could push yourself into the 32% or 35% tax bracket. Instead, exercise in tranches across multiple years to keep each year's income in a lower bracket.

Example: You have 10,000 NSOs with a $20 exercise price and the stock is at $50. Exercising all at once creates $300,000 in ordinary income. Spread over three years, that is $100,000 per year, potentially keeping you in the 24% bracket instead of the 35% bracket.

Strategy 2: Exercise and Hold for Long-Term Gains

After exercising NSOs, any additional appreciation is treated as a capital gain. Hold the shares for at least one year after exercise to qualify for long-term capital gains rates (0%, 15%, or 20%) instead of short-term rates (up to 37%).

Strategy 3: Coordinate with Other Income Events

If you know you will have a low-income year (sabbatical, career change, parental leave), exercise NSOs during that year to take advantage of lower brackets. Conversely, avoid exercising in years when you have large bonuses, RSU vesting events, or other windfalls.

Strategy 4: Exercise Before an IPO or Major Price Increase

If you have NSOs in a pre-IPO company and believe the stock price will increase substantially at IPO, exercising before the price increase means a smaller spread and lower ordinary income tax. The subsequent appreciation is taxed as capital gains instead.

RSUs: Tax Planning Strategies

How RSUs Are Taxed: Quick Review

At grant: No tax

At vesting: Full fair market value is taxed as ordinary income

At sale: Capital gain or loss from the vesting price

RSUs are simpler than options because there is no exercise decision. The main planning opportunity is around what to do after vesting.

Strategy 1: Sell Immediately to Diversify

Since you are taxed at vesting regardless of when you sell, there is no tax penalty for selling RSUs immediately upon vesting. Holding creates investment risk without any tax advantage. Many financial advisors recommend selling immediately and reinvesting in a diversified portfolio.

Strategy 2: Hold for Long-Term Capital Gains

If you believe in the company's stock and want to hold, waiting at least one year after vesting converts any additional appreciation from short-term to long-term capital gains. This can save you 15-20 percentage points in tax on the appreciation.

Strategy 3: Manage Supplemental Withholding

Most employers withhold a flat 22% on RSU income (37% above $1 million). If your actual marginal rate is higher, you may owe additional tax at filing. Adjust your W-4 or make estimated payments to avoid underpayment penalties.

Strategy 4: Donate Appreciated RSU Shares

If you have held RSU shares for more than one year and they have appreciated, donating them to charity lets you deduct the full fair market value while avoiding capital gains tax on the appreciation. This is more tax-efficient than selling the shares, paying capital gains tax, and donating cash. See our charitable giving guide for details.

The 83(b) Election: A Powerful Tool for Restricted Stock

If you receive restricted stock (not RSUs, but actual shares subject to vesting), you can file an 83(b) election within 30 days of the grant. This tells the IRS you want to be taxed on the grant-date value rather than the vesting-date value.

Why this matters: If you receive restricted stock worth $1 per share when granted, and it vests when shares are worth $50, an 83(b) election means you pay tax on $1 per share now instead of $50 per share later. All appreciation from $1 to $50 is taxed as long-term capital gains instead of ordinary income.

The risk: if you leave the company and forfeit unvested shares, you cannot recover the tax paid on the 83(b) election.

Tax Planning Around Major Events

Before an IPO

Exercise ISOs while the spread is small to minimize AMT

Consider 83(b) elections for any restricted stock received

Model different stock price scenarios and their tax impact

Set up a diversification plan for post-lockup sales

Before Leaving the Company

ISOs typically expire 90 days after leaving (check your plan). Unexercised options may be lost.

NSOs may have a longer post-termination exercise window. Verify your plan terms.

Unvested RSUs are typically forfeited upon departure.

Consider accelerating exercises before your last day.

During a High-Income Year

Avoid exercising additional options if possible

Maximize 401(k) and HSA contributions to offset income

Consider charitable donations of appreciated shares

Harvest investment losses in your brokerage account to offset gains

Putting It All Together: A Multi-Year Approach

The most effective equity compensation tax planning considers your situation over multiple years. Build a spreadsheet or use tax planning software to model:

Expected vesting schedule for RSUs

Planned ISO and NSO exercise timing

Projected ordinary income from salary and bonuses

Estimated capital gains from share sales

Available deductions and credits each year

Shifting income across years by timing exercises and sales can save substantial amounts compared to reacting to each event in isolation.

Taxation.ai models multi-year equity compensation scenarios, calculates AMT exposure for ISO exercises, and recommends optimal exercise and sale timing based on your complete tax picture. Upload your equity compensation statements to get personalized planning recommendations.