RSU, ISO, and NSO Tax Guide: What Changes and When

Identify the award and map every relevant date

Start by confirming the exact award type. A grant date, vesting date, exercise date, settlement or transfer date, and sale date are different events. Some awards use shares, some use cash, and plan terms can add restrictions or delayed settlement that change the analysis.

Reconcile employer and brokerage records instead of relying on one form. A Form W-2 may report compensation, Form 3921 reports information about an ISO exercise, and Form 1099-B may report a later sale. The basis shown by a broker may still require review against compensation already included in income.

• Grant notice, plan document, and vesting schedule
• Exercise and settlement confirmations with dates and fair market values
• Forms W-2, 3921, and 1099-B, plus year-end brokerage statements
• Shares withheld or cash paid for withholding and the remaining shares received
• Sale confirmations, trading fees, and prior-year returns involving the award
• Work and residence locations during the earning, vesting, exercise, and sale periods

RSUs: separate the grant, vesting, settlement, and later sale

A restricted stock unit is generally a promise to deliver cash or stock in the future rather than an immediate transfer of stock at grant. Under the general federal rules, the taxable compensation event typically occurs when the award is paid or shares are transferred after vesting, although the plan terms and any deferral rules must be reviewed.

Employers often withhold shares or cash when an RSU settles and report compensation on Form W-2. Withholding is a payment toward tax, not a guarantee that the full federal and state liability has been covered. A later sale is a separate transaction, so retain the value used for wage reporting and the number of shares actually received to support basis and gain or loss.

NSOs: exercise can create compensation before a sale

For most nonstatutory stock options without a readily determinable value at grant, federal compensation is generally recognized when the option is exercised. The amount is generally based on the fair market value of the shares at exercise minus the exercise price, subject to the award's facts and restrictions. For an employee, the employer generally reports the exercise spread as wages.

Selling the acquired shares creates a separate capital gain or loss calculation. The basis generally includes the amount paid to exercise plus compensation already included in income. IRS guidance warns that Form 1099-B basis for compensatory options granted on or after January 1, 2014, will not reflect compensation included on grant or exercise, so the broker form should not be accepted without reconciliation.

ISOs: review AMT at exercise and the holding period at sale

An incentive stock option generally does not create regular federal income when granted or exercised. The exercise can still create an alternative minimum tax adjustment based on the applicable fair market value and exercise price. Form 3921 supplies dates and values used in that review, but it does not calculate the tax result.

When the shares are sold, the federal character of the result depends in part on whether the statutory holding-period requirements were met. A sale that does not meet them can produce ordinary income in addition to any capital gain or loss. Regular-tax and AMT basis can differ, so preserve the exercise-year calculation for the eventual sale year.

Revisit withholding, estimated tax, and state reporting

A vesting, exercise, or sale can materially change projected income and tax payments. Compare year-to-date withholding and estimated payments with the expected full-year federal and state results before the payment deadlines. Do not assume that share withholding used by an employer matches the taxpayer's final marginal rate or all states involved.

Multi-state work or a move during the grant-to-vest or grant-to-exercise period can create allocation and filing questions. State rules vary and may look to work location, residence, sourcing periods, or other facts. Equity-compensation tax planning should be coordinated with the award terms and investment decisions; a tax projection is not a recommendation to exercise, hold, or sell a security.