TL;DR Answer Box
ISOs vs RSUs taxes can produce very different after-tax outcomes even when the headline “grant value” is the same. RSUs are typically taxed as ordinary income when they vest, while ISOs may avoid ordinary income tax if you meet qualifying disposition rules, but they can trigger Alternative Minimum Tax (AMT) when you exercise and hold. The right answer depends on timing, cash planning, and risk, not just tax rates. Last updated: February 17, 2026.
Introduction
Equity compensation is one of the fastest ways high earners build real wealth in tech. It is also one of the fastest ways to create a surprise tax bill.
Here is the trap. Two people can receive the same “$100,000 of equity” and still end up with very different after-tax outcomes, simply because the tax rules and decision points are different for ISOs and RSUs.
The quick answer
What makes ISOs different
Incentive Stock Options (ISOs) can be more tax-efficient than RSUs if you meet the holding period rules for a qualifying disposition. In the best-case scenario, more of the gain may be taxed as long-term capital gains rather than ordinary income.
The catch is AMT. When you exercise ISOs and hold the shares, the “bargain element” (fair market value at exercise minus your exercise price) may be treated as income for AMT purposes, even though you did not sell shares and may not have cash.
What makes RSUs different
Restricted Stock Units (RSUs) are usually simpler. When RSUs vest, the fair market value of the shares at vest is typically treated as W-2 ordinary income. After that, any additional appreciation may be taxed as capital gains when you sell.
The trade-off is that RSUs tend to create a larger ordinary income event up front, especially in high-income years.
Bob vs Julia case study
Bob and Julia both work for fictional tech companies. Bob receives $100,000 worth of ISOs, and Julia receives $100,000 worth of RSUs. Their situations are identical outside of their equity type.
This example uses simplified assumptions to illustrate mechanics. Actual results depend on your income, deductions, state, withholding, market performance, and holding periods.
Bob (ISOs)
Bob is granted ISOs worth $100,000 for $50,000. When he meets the vesting criteria, he pays $50,000 out of pocket to exercise.
Assume the value of Bob’s shares at exercise is $150,000. Under the simplified assumptions in this example, Bob does not owe regular income tax when he exercises his ISOs. However, the bargain element is $100,000 ($150,000 minus $50,000), and that bargain element may be included in AMT calculations.
Here is the simplified walkthrough as written in your example:
- Bargain element added to AMTI: $100,000
- AMT exemption (single, 2023 example figure): $81,300
- AMTI subject to AMT (simplified): $18,700
- AMT rate used in the example: 26%
- AMT due (example math): $4,862
If Bob later sells at $200,000 after meeting the holding period rules for a qualifying disposition, the example assumes his profit is $150,000 (sale price $200,000 minus exercise cost $50,000) and that it is taxed at 15% long-term capital gains, or $22,500.
In the example, Bob pays total taxes of $27,362 ($4,862 plus $22,500) and keeps $172,638.
Two planning notes for high earners:
- Liquidity risk: AMT can be due even if you cannot sell shares, especially for private company stock.
- Concentration risk: Exercising and holding increases exposure to a single stock. A better tax outcome does not always equal a better outcome.
Julia (RSUs)
Julia is granted $100,000 worth of RSUs that vest on the same schedule. Assume that when her RSUs vest, their value is $150,000.
In your example, the $150,000 value at vest is taxed as ordinary income in the year of vesting. The example assumes a 30% effective tax (federal plus payroll, and no state income tax), so $45,000 of tax.
If she holds and sells one year later when the shares are worth $200,000, the example assumes long-term capital gains tax on the $50,000 of additional appreciation (sale price $200,000 minus $150,000 vest value). At 15%, that is $7,500.
In the example, Julia pays total taxes of $52,500 and keeps $147,500.
Two planning notes for high earners:
- Withholding surprises: RSU withholding may not equal what you ultimately owe, especially with bonuses, other income, and multiple vest events.
- Tax drag timing: The big ordinary income event happens at vest, regardless of whether you sell immediately or hold.
Side-by-side comparison
- Tax timing: ISOs may create AMT at exercise (if you exercise and hold). RSUs typically create ordinary income at vest.
- Example total tax paid: Bob $27,362. Julia $52,500.
- Example after-tax kept: Bob $172,638. Julia $147,500.
- Key driver: The example favors ISOs because the later gain is assumed to receive long-term capital gains treatment under a qualifying disposition.
What this means for high earners
This comparison is useful, but the decision is not simply “ISOs are better.” High earners should focus on the variables that actually drive outcomes:
- Your ability to meet holding periods: If you cannot hold long enough, the ISO advantage may shrink.
- Your cash runway: ISO exercise cost and AMT exposure can create a real cash need.
- Company liquidity and restrictions: Private company equity can magnify risk because you may not be able to sell when you need to.
- Portfolio concentration: The tax tail should not wag the investment dog.
If you want the bigger picture on equity compensation, start here: Tax Implications of Equity Compensation in Tech.
Common mistakes
- Exercising ISOs without an AMT model. AMT can show up when you least expect it.
- Letting taxes alone drive the decision. Holding to “get the tax rate” can increase concentration risk.
- Assuming RSU withholding is enough. It may be too low depending on your bracket and other income.
- Not coordinating timing. The timing of exercise, vesting, and selling can matter as much as the numbers.
Action steps
- Inventory your equity. Know exactly what you have: ISOs, NSOs, RSUs, ESPP, and the vest schedule.
- Model before you act. For ISOs, model exercise cost, bargain element, potential AMT, and downside risk. For RSUs, model the income spike and withholding gaps.
- Decide your default sell strategy. “Sell to cover,” “sell all,” and “hold a portion” produce different risk and tax outcomes.
- Coordinate with your CPA. AMT credit tracking and multi-year planning matters for ISO-heavy households.
- Write it down. Your best strategy is the one you can repeat across years without reinventing the wheel every April.
If you want an ISO-specific planning framework, use: ISOs Strategy: Avoid AMT & Build Long-Term Wealth.
Key Takeaways
- ISOs vs RSUs taxes can diverge dramatically even at the same grant value.
- RSUs are typically taxed as ordinary income at vest. ISOs can be more tax-efficient if you meet qualifying disposition rules.
- ISOs can trigger AMT when you exercise and hold, which can create a cash problem if you cannot sell shares.
- The best strategy balances taxes, liquidity, holding periods, and concentration risk.
- Model first. Then decide.
Facts/FAQ
Are ISOs always better than RSUs?
No. ISOs may be more tax-efficient under a qualifying disposition, but they can introduce AMT and liquidity risk. RSUs are often simpler and more predictable, but they usually create ordinary income at vest.
When do RSUs get taxed?
RSUs are typically taxed as ordinary income when they vest, based on the fair market value on the vest date. After vest, future gains or losses depend on your sale price and holding period.
When do ISOs get taxed?
ISOs can create different tax outcomes depending on when you exercise and sell. A key issue is that the bargain element at exercise may be included in AMT calculations if you exercise and hold. When you sell, the holding period can determine whether the sale is treated as a qualifying disposition.
What is a qualifying disposition for ISOs?
A qualifying disposition generally means you hold ISO shares long enough to meet required holding periods before selling. When those requirements are met, the sale may receive more favorable tax treatment than a disqualifying disposition. The exact outcome depends on your facts and should be confirmed with your tax professional.
How does AMT change the ISO decision?
AMT can create tax due at exercise even if you do not sell shares. That makes the decision less about “tax rate” and more about cash planning, downside risk, and whether you can hold through volatility.
What should I model before exercising ISOs?
At minimum: exercise cost, potential AMT, downside risk if the stock falls, and your liquidity timeline. Tailored Wealth often helps high earners model this as part of a coordinated plan so the tax decision and investment decision stay aligned.
Internal Links
- ISOs Strategy: Avoid AMT & Build Long-Term Wealth: A practical ISO decision framework, including pacing and AMT awareness.
- Case Study: AMT and Equity Compensation (ISOs, RSUs): A deeper look at AMT dynamics that commonly hit tech employees.
- Tax Implications of Equity Compensation in Tech: Broader equity compensation tax context for high earners.
External Links
CTA
If you are a high earner with equity comp, the goal is not to memorize tax rules. The goal is to build a repeatable decision process: model the tax impact, plan liquidity, and reduce concentration risk without missing the upside you are working for.
If you want help making your ISO and RSU decisions in a coordinated way, Tailored Wealth can help you model outcomes, coordinate with your CPA, and build an equity plan that fits your full financial picture. Start with your Wealth Resilience Scorecard or a planning consult.
Disclaimer
This content is for general education only and is not tax, legal, or investment advice. Tax rules and outcomes depend on your facts and may change. Work with a qualified tax professional before implementing any strategy.