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RSUs, ESPPs and Stock Options: How Equity Pay Is Taxed, in Plain English

Last reviewed October 2026 by the 1099tax.app team. These tools give estimates, not tax or legal advice.

Stock is now a normal part of pay at many companies, and it comes in several forms: restricted stock units (RSUs), employee stock purchase plans (ESPPs), incentive stock options (ISOs) and nonqualified stock options (NSOs). Each is taxed differently, at different moments. Knowing when the tax hits matters as much as knowing how much, because that's where most surprises come from. This guide walks through each type with the 2026 numbers.

For an RSU vest, our RSU Tax & Withholding Calculator does the math for you.

RSUs: taxed when they vest

What they are: a promise of shares once you've worked long enough. There's nothing to buy.

When the tax hits: at vest. The shares' value that day is wages. It's on your W-2 and subject to income tax, Social Security (up to the $184,500 wage base for 2026) and Medicare.

Withholding: employers usually withhold federal tax at a flat 22% on supplemental wages, and 37% on supplemental wages above $1 million in a year (IRS Publication 15). If your real bracket is higher, you'll owe more in April.

When you sell: your cost basis is the value at vest. Only the change after vest is a capital gain or loss, long-term if you've held the shares more than a year after vesting.

ESPPs: buying at a discount

What they are: a plan that lets you buy company stock through payroll deductions, often at a discount. In a "qualified" (Section 423) plan:

  • The purchase price can be as low as 85% of the stock's value (a discount of up to 15%), often figured on the lower of the price at the start or end of the offering period.
  • You can buy no more than $25,000 of stock per calendar year, measured at the grant-date value.

When the tax hits: not at purchase. Tax comes when you sell, and how it's taxed depends on how long you held the shares.

  • Qualifying disposition: you sell at least 2 years after the offering (grant) date and at least 1 year after you bought the shares. Part of the gain, generally the smaller of the discount measured at the grant date or your actual gain, is ordinary income. The rest is long-term capital gain.
  • Disqualifying disposition: you sell earlier. The discount at purchase (the value on the purchase date minus what you paid) is ordinary income, and any further change is a capital gain or loss.

Your employer sends Form 3922 after you first transfer ESPP shares.

ISOs: no regular tax at exercise, but watch the AMT

What they are: options to buy shares at a fixed "strike" price. Incentive stock options must meet strict rules. Generally, no more than $100,000 worth of ISOs (measured at grant-date value) can first become exercisable in any one year. Any excess is treated as NSOs.

When the tax hits:

  • At exercise: no regular income tax. But the "spread" (value minus strike price) counts toward the alternative minimum tax (AMT).
  • At sale, if you meet the holding periods (2 years from grant and 1 year from exercise): the whole gain over the strike price is long-term capital gain.
  • If you sell sooner: part of the gain becomes ordinary income.

2026 AMT figures (IRS Rev. Proc. 2025-32): exemption of $90,100 for single filers and $140,200 for married couples filing jointly. The exemption phases out starting at $500,000 and $1,000,000 of alternative minimum taxable income. The 28% AMT rate applies above $244,500. Your employer reports ISO exercises on Form 3921.

NSOs: taxed at exercise

What they are: stock options that aren't ISOs, common for both employees and contractors.

When the tax hits: at exercise. The spread is ordinary income: wages on a W-2 for employees, and nonemployee income for contractors. Your basis in the shares is the stock's value at exercise. Later changes are capital gains or losses.

The 83(b) election

If you receive restricted stock (actual shares that vest over time, not RSUs), or exercise options early before vesting, you can choose to be taxed now on the current value instead of as the shares vest. You do this by filing an 83(b) election (IRS Form 15620 or an equivalent statement) within 30 days of receiving the shares. It can save a lot if the value is low and rising. It's generally irrevocable, and the deadline is strict.

Worked examples

ESPP, qualifying sale: at the offering date the stock is $40. At purchase it's $50, and you buy at 85% of the lower price: $34. Two years later you sell at $60.

  • Discount at grant: 15% × $40 = $6 a share, which is ordinary income (smaller than your actual $26 gain)
  • Long-term capital gain: $60 − $34 − $6 = $20 a share

ESPP, disqualifying sale: same purchase, but you sell at $60 after six months.

  • Ordinary income: $50 − $34 = $16 a share (the discount on the purchase date)
  • Short-term capital gain: $60 − $50 = $10 a share

ISO exercise: you exercise 1,000 ISOs at a $10 strike when the stock is worth $60.

  • Regular tax at exercise: $0
  • AMT adjustment: $50,000. Depending on your other income, this may create AMT. Run the numbers before you exercise.

Common mistakes

  1. Double-counting basis. Brokers often report $0 or the strike price as basis on Form 1099-B. Adjust it on Form 8949 to include the income already on your W-2.
  2. Exercising a big block of ISOs in December without checking AMT.
  3. Selling ESPP shares a few days too soon and losing qualifying treatment.
  4. Relying on 22% RSU withholding when your bracket is higher.
  5. Missing the 30-day 83(b) deadline.
  6. Forgetting state tax. Equity earned while you lived or worked in another state may be partly taxable there.

Frequently asked questions

They're different. RSUs have value even if the stock falls. Options are worth something only if the stock rises above the strike price.

Related tools

Sources

These tools give estimates, not tax or legal advice.

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