What is the difference between RSUs and stock options? RSUs (Restricted Stock Units) are shares given to you by your employer that are taxed automatically as ordinary income on their full market value at vesting. Stock options are the right to buy shares at a fixed price (the strike price), giving you control over when to trigger taxes upon exercise.
The core difference: delivery vs. the right to buy
The fundamental difference lies in what you receive on your vesting date:
- Restricted Stock Units (RSUs) are a direct commitment to deliver shares to you once you meet your vesting schedule. You do not purchase them; they land in your account.
- Stock options are a contract giving you the option to buy shares at a fixed strike price. You do not own the stock at vesting; you choose to exercise and pay the strike price to acquire the shares.
The two pathways diverge at vesting:
- RSU pathway: vesting date, then shares delivered, with automatic tax on their full value.
- Stock option pathway: vesting date, then the right to buy, where you choose when to exercise and pay the strike price.
This structural difference (getting shares automatically versus getting the right to buy them) shapes how each is taxed and managed.
How RSUs are taxed
RSU taxation is straightforward under Internal Revenue Code Section 83. The entire market value of your shares is treated as ordinary salary on the day they vest.
- At grant: no tax is owed.
- At vesting: the fair market value of the vesting shares is taxed as ordinary income. Most companies automatically run a “sell-to-cover” transaction, selling a portion of the newly vested shares to cover withholding.
- At sale: the vesting price becomes your cost basis. Any growth from that point is taxed as a capital gain.
If you have 1,000 RSUs that vest when the stock trades at $50, you instantly recognize $50,000 of ordinary income. Sell those shares a year later at $70 and you owe capital gains tax on the $20,000 of growth. Note that you cannot file an 83(b) election on standard RSUs, because no actual property is transferred to you on the grant date.
How stock options are taxed
Stock options do not trigger ordinary tax at vesting. Instead, you face tax when you exercise, and the treatment depends on the type:
- NSOs. At exercise, the spread (market price minus strike price) is taxed as ordinary income. Future growth is a capital gain.
- ISOs. No regular income tax at exercise, but the spread is an Alternative Minimum Tax (AMT) preference item. Hold the shares at least two years from grant and one year from exercise, and the entire gain at sale qualifies for long-term capital gains treatment.
RSUs vs. options: side by side
| Feature | RSUs | Stock options (ISOs and NSOs) |
|---|---|---|
| What you receive | Actual shares of stock | The right to buy shares at a set strike price |
| Out-of-pocket cost | $0 | You pay the strike price to exercise |
| Tax trigger | Automatically at vesting | When you choose to exercise |
| Tax type at trigger | Ordinary income on full share value | NSO: ordinary income on spread. ISO: AMT preference item |
| Risk of going worthless | Only if the stock hits $0 | Yes, if the price falls below your strike |
| Capital-gains holding clock | Starts at vesting | Starts on the day you exercise |
Key planning strategies
For RSUs: vesting income is treated as salary. Because companies typically withhold at a flat 22% rate, high earners are often under-withheld and face a surprise bill in April. Work with a CPA to decide whether you need quarterly estimated payments or a W-4 adjustment.
For options: timing is everything. Confirm you have the cash to cover both the strike price and any tax, and watch your AMT exposure if you hold ISOs. Stacking option exercises and RSU vests in the same year can push you into a higher bracket, so coordinate. For the ISO and NSO details, see ISO vs NSO, and for restricted stock, the 83(b) election.
