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 4, 2026

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RSUs: The Simplest, Still Misunderstood

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.

NSOs: Tax at Exercise (Always)

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.
NSOs always trigger ordinary income at exercise, regardless of whether you sell.

ISOs: The AMT Trap

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, which is 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.

ESPP: Often Overlooked

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).

Concentration and Planning

When equity becomes 25%+ of net worth, many advisors weigh concentration risk against tax savings; discuss the trade-off with your investment advisor. 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. The deadline is 30 days 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, a 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.

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Educational content, not tax, legal, or accounting advice. Confirm with a CPA before acting.

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