Tax

AMT, ISOs, NSOs, and RSUs: A Survival Guide

Equity comp tax is where high-income professionals lose the most money — usually to AMT. Here's the framework for each instrument.

By Aparna Devalla, CPA4 min · 5 slidesUpdated May 3, 2026

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RSUs are taxed as ordinary W-2 income at vest, on the fair market value at vest. The employer typically withholds shares to cover the tax.
The default withholding rate (22% federal supplemental) is almost always too low for high earners. Your real marginal rate is 32–37% federal + state.
Hold the shares post-vest? Capital gains/losses on the appreciation/decline from vest forward, treated as long-term if held 12+ months.
Common error: not withholding enough on the vest, then owing tens of thousands at filing. Fix: increase W-2 withholding via Form W-4 to cover the gap.

NSO (non-qualified stock option) exercise: spread between strike and FMV is ordinary W-2 income, withheld at the time of exercise.
After exercise, you own the shares. Future appreciation/depreciation is capital gain/loss measured from the FMV at exercise.
Held shares 12+ months post-exercise = long-term capital gain (lower rate) when sold.
Cashless / same-day-sale exercise: you pay ordinary tax on the spread, no further capital gain/loss because there's no holding period.
Always — NSOs trigger ordinary income at exercise, regardless of whether you sell.

ISO (incentive stock option) exercise has no regular tax — but the spread between strike and FMV is an AMT preference item, potentially triggering Alternative Minimum Tax.
If you hold ISO shares for 1 year past exercise AND 2 years past grant, the entire gain at sale is long-term capital gain (lowest rate) — the 'qualifying disposition.'
Disqualifying disposition (sell before holding requirements): the spread becomes ordinary income, and additional gain is short or long term depending on hold.
AMT on a paper gain is real cash you owe even if you never sold the shares. If the stock then drops, you owe AMT on a phantom number — devastating in down markets.
Mitigation: exercise small batches each year staying under the AMT threshold; sell some shares same-year to fund the AMT bill; carry AMT credit forward to recover in future years.

Employee Stock Purchase Plans typically offer a 10–15% discount with a lookback feature. The discount is ordinary income at sale.
Qualifying disposition (held 1 year past purchase AND 2 years past grant): only the lesser of (FMV at grant × discount) or (sale price minus purchase price) is ordinary income; rest is long-term capital gain.
Disqualifying disposition: the entire discount at purchase is ordinary income, plus capital gain/loss on the post-purchase movement.
Most participants assume ESPP shares are 'just stock' — they're not, and the 1099-B is often wrong (it doesn't include the ordinary income piece, leading to double taxation if you don't adjust basis).

When equity becomes 25%+ of net worth, prioritize diversification over tax optimization. A 50% drop on a concentrated position dwarfs any tax savings from holding.
Coordinate equity transactions with a CFP and a CPA — sales decisions affect tax bracket, AMT, NIIT (3.8%), and state residency planning.
Section 83(b) elections on early-exercise stock options (typically pre-IPO startups) accelerate income to grant date, locking in low value before appreciation. 30-day deadline from grant — miss it and you can't recover.
QSBS (Section 1202) can exclude up to $10M (or 10× basis) of gain on qualifying small-business stock held 5+ years — major opportunity for early employees and founders.
Need an equity comp tax review? Rubric Financial handles AMT modeling, ISO exercise planning, and ESPP adjusted-basis returns.