Daperis CPAISOs, NSOs, RSAs, RSUs: How Each One Actually Gets Taxed
Not all equity compensation gets taxed the same way, and the differences matter a lot more than the acronyms suggest. Some grant types let you lock in a small tax bill today in exchange for treating everything else as a capital gain later. Others don't give you that choice at all. Here's how the four common types actually compare, and the two mistakes that trip up almost everyone who holds them.
Most Common Equity Compensation
ISO (Incentive Stock Option)
Taxed: At exercise (AMT only), then again at sale
What's taxed: An AMT preference item on the spread at exercise; a capital gain at sale if you meet the holding requirements
83(b) election available: Rarely relevant, only if early-exercised
NSO (Non-Qualified Stock Option)
Taxed: At exercise
What's taxed: Ordinary income on the spread between your strike price and fair market value
83(b) election available: Yes, if early-exercised
RSA (Restricted Stock Award)
Taxed: At vest, unless you file an 83(b) election
What's taxed: Fair market value at vest, or fair market value at grant if you elected 83(b)
83(b) election available: Yes
RSU (Restricted Stock Unit)
Taxed: At vest, always
What's taxed: Fair market value at vest
83(b) election available: No, not available since nothing is transferred at the grant date
The Withholding Gap That Catches RSU and NSO Holders
Your employer withholds a flat rate, not your actual rate
When RSUs vest or NSOs are exercised, employers generally withhold federal tax at the flat supplemental wage rate: 22% on the first $1 million of supplemental wages in a calendar year, 37% above that. That rate has nothing to do with your actual marginal bracket. For 2026, the 22% federal bracket for single filers only runs up to roughly $105,700 of taxable income. Above that, you're already in the 24% bracket or higher, and every dollar of vesting or exercise income is being under-withheld against what you'll actually owe.
It compounds for anyone with real equity comp
If your base salary alone already puts you above that threshold, and it does for a lot of people receiving meaningful grants, the full value of every vest or exercise gets withheld at a rate several points below reality. Layer in State (and possibly local) income tax on top, and you may end up with a larger than expected tax bill by the time you file.
The Mistake That Actually Taxes You Twice
This is the one that costs real money
When you eventually sell shares from any of these grant types, your brokerage sends a 1099-B reporting the sale. Here's where most go wrong: if your cost basis isn't correctly reflected as the value that was already taxed as ordinary income (at vest for RSAs and RSUs, at exercise for NSOs), tax software or an inattentive preparer can end up treating the entire sale price as taxable gain, as if your basis were zero. Since you already paid ordinary income tax on that value once, taxing the full sale proceeds again means paying tax twice on the same dollars.
Why this happens so often
Brokerage 1099-B forms don't always report the correct basis automatically. This is because they usually only report what you paid for the shares. In the case of RSU's for example, this is usually nothing or very little. Because the brokerage doesn't know the fair market value of what you paid taxes on already, you will need to check your W-2 and company records. If you simply import the 1099-B without adjusting the basis, you'll end up with the wrong gain calc most of the time.
When an 83(b) Election Actually Makes Sense
The core logic
You're betting that today's value is low and that it'll be meaningfully higher by the time the shares would otherwise vest. File the election, pay tax now on a small number, and everything above that basis becomes a capital gain instead of ordinary income when you eventually sell, taxed at a lower rate if you hold long enough. It also starts your long-term capital gains clock immediately, instead of restarting with every vesting tranche.
Where it's most powerful
If you're an early employee at a company where fair market value is still close to your strike price, or an RSA holder whose grant-date value is small, the ordinary income you're locking in with an 83(b) can be close to nothing. Wait until each tranche vests instead, and you could be paying ordinary income tax on a fair market value that's grown substantially, resetting your capital gains clock with every new batch.
The deadline is absolute
You must file the election with the IRS within 30 days of the grant or early exercise. No extensions, no late-filing relief, no exceptions for missing it by even a day. If you're early-exercising specifically to make an 83(b) worthwhile, have the paperwork ready before you exercise, not after.
The real risk you're taking
An 83(b) election isn't free optionality. You're paying tax now on shares you don't get to keep unless you actually vest into them. Leave the company, or watch it stumble, before your shares fully vest, and you've paid tax on stock that's now worthless or forfeited, with no way to get that tax back. It's a real bet on your own retention and the company's trajectory, not a guaranteed win.
Keep It Simple / Key Takeaway 🍕
Look into the specifics before you assume anything about your grant. RSUs get taxed once at vest with no 83(b) option, ever. RSAs and early-exercised options give you a real choice, and that choice only pays off when today's value is genuinely low and you're confident enough to take the forfeiture risk. Either way, when you sell, make sure your cost basis is right, or you're volunteering to pay tax twice on money you already paid tax on once.
Disclaimer: This article is for educational and informational purposes only and is not intended as financial, investment, legal, or tax advice. The author assumes no liability whatsoever in connection with its use. This content is not an exhaustive explanation of any topic, practice or process. You should always seek the advice of a licensed professional before making any accounting, tax, financial, investment or legal decision.