What’s the Difference Between ISOs, NSOs, and RSUs?

September 10, 2025 | By Jessica Goedtel, CFP®

Equity comp can feel like a foreign language. You’re stuck in Acronym City without a translator. ISOs, RSUs, NSOs… what the heck? These letters can make a big difference in your finances, but most tech workers never get a clear explanation. That’s what this post is for: a simple breakdown of what each one is, how they work, and what you should watch out for.
First, let’s spell out what the acronyms stand for:

• RSUs – Restricted Stock Units
• ISOs – Incentive Stock Options
• NSOs (or NQSOs) – Non-Qualified Stock Options

RSUs and Restricted Stock

These are grants of company stock awarded to you, and the stock becomes yours based on a vesting schedule. Vesting schedules change from company to company: they can be monthly, quarterly, yearly, or even a mixture.

How are RSUs and Restricted Stock taxed?

Each time the stock vests and becomes yours, it’s considered taxable income. Some of the shares will get withheld for taxes, but the rest will get deposited into your account. From there, you can decide whether to keep the stock or sell it. When you keep the stock, there’s a second layer of taxes. If it goes up in price and you sell, there will be capital gains taxes on top of the taxes you paid when the stock vested*.

RSUs and Restricted Stock function similarly, and sound interchangeable. However, there’s one key difference: with Restricted Stock, you can make an 83(b) election. This election allows you to be taxed on the value of your grants before they vest, which could be a good idea if you think the stock will climb in price.

The Basics of Stock Options (ISOs and NSOs)

The basic idea of stock options seems straightforward. The company gives you the right (or option, that’s where the name comes from) to buy shares at a set price. In practice, though, they can be a lot more difficult to manage.

Let’s start with the basic components of both:

• Grant price (or strike price). This is the price you get to buy the stock.
• Vesting schedule. The dates you will be able to purchase the stock. Like RSUs and restricted stock, vesting schedules vary greatly.
• Expiration date. The date that your options expire if you haven’t done anything with them yet.

The main event happens when you exercise your right to buy the stock. This is when taxes become a consideration, and this is where ISOs and NSOs differ.

Taxation of NSOs

NSOs are the simpler of the two. When you exercise your option, you’re taxed on the difference between the grant price and the fair market value (aka the spread) of the stock. For this reason, you don’t want to exercise stock that’s worth less than the grant price.

There are different types of exercise options, which is its own blog post topic. But the TLDR is you can either hold the stock or just take the cash. Either way, taxes will get withheld (but maybe not enough!).

How are ISOs different than NSOs?

ISOs have a special tax treatment when you exercise & hold the shares. Instead of paying ordinary income taxes on the spread, you could be eligible for long-term capital gains rates which are much lower. There are a few steps and caveats, however.

First, there is a holding period requirement. You need to hold the shares at least two years from the grant date and at least one year from the exercise date. Both of these holding periods must be met to qualify for the special tax treatment. If they have, your shares will be taxed at your long-term capital gains rate when you sell.

The ISO Tax Trap: Alternative Minimum Tax

Since we’re talking about saving potentially a lot of money on taxes, you might be asking, that’s it? Ha, of course not. It’s never that easy. Exercising ISOs is subject to Alternative Minimum Tax (AMT) in the year of exercise. The best way I can describe AMT is that it’s a side tax calculation to make sure people aren’t getting too many tax breaks (in theory, anyway). Most people never worry about it since it’s hard to trigger. But exercising and holding ISOs happens to be one thing that almost always triggers it.

Why does triggering AMT matter? It makes the exercise-and-hold strategy much riskier. First, you’re putting out money to buy the shares. Next, you’re putting out money for the AMT tax when you file your taxes. Then you are waiting for two years hoping that the stock continues to go up in price.

There is a sweet spot where you can exercise ISOs without triggering AMT at all. The amount depends on a bunch of variables, including your income and the stock value. It takes careful planning and is a great reason to call a financial planner 😊

What happens if I don’t exercise my ISOs or NSOs?

If you never exercise them, then at some point they will expire. There’s no tax because nothing happened. This can happen if the stock is worth less than the grant price. But it can also happen if you forget about your expiration dates. Check on your stock plan periodically so you don’t miss any opportunities.

Which one is best?

Trick question! They all have their pros and cons. RSUs may be easier to handle, but ISOs can save you a lot of money on taxes. ISOs can mean AMT, and NSOs are simpler to plan around. If your company allows you to choose the mixture of what you receive, try to weigh these options as best you can. The only way you’ll know for sure which one is best is if you have a crystal ball.

Every company’s stock plan is unique, with different considerations and nuances. But understanding the basics can help you make smarter decisions. If you’re unsure how your stock fits into your bigger financial picture, that’s exactly where planning comes in! Book a call here.

*To get a little technical here, this happens no matter what. When the shares vest, they become yours and the IRS starts the clock. If it takes you a day or two to sell the shares, you’re still recognizing a capital gain (or loss). It’s just usually minor, depending on the stock price movement.