What's the Difference Between Stock Options and RSUs for Tax Purposes?

Stock options and restricted stock units (RSUs) are both forms of equity compensation, but they're taxed at different times and in different ways. RSUs are taxed when they vest — when you receive the shares, their full market value is treated as ordinary income and subject to payroll taxes, just like a cash bonus. Stock options are different: you get the right to buy shares at a set price (the exercise price), and the tax treatment depends on whether they're incentive stock options (ISOs) or non-qualified stock options (NSOs). Non-qualified options are taxed as ordinary income when you exercise them, based on the spread between the exercise price and the stock's current value. Incentive stock options generally aren't taxed when exercised, but exercising them can trigger the Alternative Minimum Tax, and you pay long-term capital gains rates if you hold the shares long enough. RSUs are simpler from a tax standpoint since the tax event is clear, while options require more planning around when and how to exercise.