Equity Compensation: ISO, NSO, RSU, and the Tax Traps

Restricted stock units are taxed as ordinary income at vest based on fair market value. Companies typically withhold at statutory rates (often 22%), which is usually too low for high earners — leading to surprise April balances unless you adjust estimates.

Selling vested shares immediately ('sell to cover plus same-day sale') converts equity into cash and eliminates concentration risk.

Incentive stock options can qualify for long-term capital gains treatment if held more than two years from grant and one year from exercise.

The trap is AMT: exercising and holding ISOs creates an AMT preference item that can trigger a large bill in the exercise year — even before you sell anything.

Non-qualified stock options are taxed as ordinary income at exercise on the spread between strike price and FMV. Withholding usually applies. Cashless exercises simplify cash flow but lock in ordinary income on the entire gain.

An 83(b) election lets you pay tax at grant based on a low FMV, instead of at vest at potentially much higher FMV. Must be filed within 30 days of grant — no extensions. Powerful when the stock is expected to appreciate.

Don't let equity comp become 50%+ of net worth. Sell to diversify on a schedule, even if the tax cost feels painful — concentration risk usually exceeds the tax cost over time.

Marginal tax bracket. AMT exposure. Cash needed for taxes. Concentration in current portfolio. Future exercise / vest schedule. Decisions made without modeling these almost always cost more than they save.