ISOs, NSOs, RSUs, the 83(b) election, AMT, and what to do when your company IPOs. The equity-compensation guide that does not require a securities attorney to read. This is educational, not legal or tax advice; big events deserve a real CPA.
READING TIME: 18 MIN
Equity compensation is one of the most complex areas of personal finance. The rules are real. The deadlines are real. The tax consequences are real and often irreversible. This page covers the common shape. A six-figure equity event deserves a CPA who has seen hundreds of them, not a blog. Not financial or legal advice.
RSUs are the simplest: you receive shares on a vesting schedule, taxed as ordinary income at vest. ISOs are the most tax-advantaged but trigger AMT risk. NSOs are straightforward but fully taxed as income on exercise. The 83(b) election can save significant taxes on restricted stock, but you have 30 days from grant to file it. Missed 83(b) deadlines are permanent.
A promise of shares on a vesting schedule. You own nothing until they vest. When they vest, the full value is taxed as ordinary income. Employer typically withholds shares to cover taxes, often at a flat 22% supplemental rate, which can under-withhold if you are in a higher bracket 🔍 verify×DON'T TRUST, VERIFYClaim: Supplemental wages (including RSU vests) are withheld at 22% up to $1M annually, 37% above.Verify at: IRS Publication 15 (Employer's Tax Guide) ↗Supplemental wage rules in Publication 15. High earners often owe more at filing..
After vesting, your cost basis equals the value at vest date. Sell later for a gain above that and you owe capital gains tax, short-term if held under a year, long-term if held over.
The decision at vest: sell immediately (eliminates concentration risk, avoids the "double bad" of the stock falling after vest while you still owe tax on the higher vest value) or hold for long-term capital gains (betting on continued appreciation, requires 1+ year from vest).
Liquid at vest. Concentration risk is the main trap: your salary and your equity are both tied to the same company.
Illiquid until IPO or acquisition. Some have dual-trigger vesting: no tax at the time trigger, tax only on liquidity event.
The right to buy company shares at a fixed price (strike) in the future. Only available to employees. No tax at grant. No regular income tax at exercise, which is the advantage over NSOs. But the spread (current value minus strike) is an AMT preference item that can create a large AMT bill even if you do not sell 🔍 verify×DON'T TRUST, VERIFYClaim: ISO exercises trigger AMT on the bargain element (spread), even without sale.Verify at: IRS Publication 525 ↗ and Topic 427 ↗ISO rules in IRC Section 422. Holding periods: 2 years from grant AND 1 year from exercise for qualifying disposition..
To get long-term capital gains rates: hold 2 years from grant date AND 1 year from exercise date. If you sell before meeting both holding periods, it is a disqualifying disposition and the spread is taxed as ordinary income.
Exercising ISOs when the spread is large can create a large AMT bill. If the stock then drops, you owe tax on value that no longer exists. This is not hypothetical. It wiped out many tech employees in the 2000 dot-com crash. Never exercise ISOs without modeling the AMT impact first.
The right to buy shares at strike price. Can be granted to employees, contractors, advisors, board members. No tax at grant. At exercise, the spread is taxed as ordinary income. Any subsequent appreciation is taxed as capital gain (short or long).
Simpler than ISOs. Less tax-advantaged at exercise. No AMT complexity.
One of the most time-sensitive tax decisions in compensation. Applies to restricted stock (actual shares), not RSUs. You file a form with the IRS within 30 days of receiving restricted stock electing to recognize income at grant rather than at vest.
Grant: 100,000 shares at $0.01 = $1,000 value today. With 83(b) election: pay ordinary income tax on $1,000 today. At 24%, that is $240. All future appreciation taxed as capital gains.
Company grows to $10/share. Sell after meeting 1-year hold: $999,000 in long-term capital gains at 20% = $199,800 tax. Without 83(b): each vest tranche taxed as ordinary income on the full value at that vest date, potentially at 37% on hundreds of thousands of dollars of "income."
The 30-day deadline is absolute 🔍 verify×DON'T TRUST, VERIFYClaim: Section 83(b) election must be filed within 30 days of receiving restricted stock; late filings are not accepted.Verify at: Rev. Proc. 2012-29 (sample 83(b) form) ↗ and Publication 525 ↗IRC Section 83(b) and Treas. Reg. 1.83-2. No late-filing relief.. Late elections are not accepted. File with the IRS service center for your region. Keep a copy. Include a copy with your tax return that year. Send via certified mail with return receipt. This is one of the few personal-finance deadlines that cannot be unwound.
Nothing in year 1. 25% vests at one-year mark. Monthly or quarterly for remaining 3 years. Common at most tech companies.
More equity vests early. Common at some large tech companies (eg 33/33/22/12).
Unvested equity accelerates only if both acquisition and role elimination happen. Standard at most companies.
All equity vests on acquisition regardless of your employment. Rare, very valuable. Ask about this in negotiations.
Typically a 180-day lockup before you can sell. After lockup, you have liquid shares and a decision. Questions to answer: what is my cost basis (what I paid or what was taxed at vest)? what is my capital-gains exposure if I sell now? what is my concentration in this stock as a percentage of net worth?
General rule: diversify after lockup. Concentration in your employer's stock is doubled risk when your income also depends on that company.
Cash deal: your unvested equity may accelerate (if double-trigger applies) or be cancelled. Stock deal: your options or RSUs may convert to acquirer's equity on specific terms. Read your offer letter and the acquisition docs carefully. The acceleration language matters enormously.
Last updated 2026-04-22. Not financial, tax, or legal advice. Complex equity events deserve a CPA.