RSUs, Restricted Stock, ISOs, NSOs, and ESPPs

The label on an award determines what the employee owns, when cash is required, which dates matter, and where tax may arise.

“Stock compensation” covers several instruments that can look similar in a portal but behave very differently. Before estimating value, identify the award. The wrong label can create the wrong exercise cost, tax date, basis and retirement value.

Restricted stock units (RSUs)

An RSU is generally a contractual promise to deliver shares or cash after specified conditions are met. The employee normally does not buy the units. Public-company RSUs commonly settle when they vest, with compensation reported through payroll. Private-company RSUs may include a second settlement trigger, so service-vested units can remain undelivered and illiquid.

Restricted stock

Restricted stock is actual property transferred subject to a substantial risk of forfeiture. The default federal income inclusion generally occurs when the property becomes substantially vested, but a timely Section 83(b) election may move income recognition to transfer. The election is irrevocable and can be costly if the shares are later forfeited or decline.

Incentive stock options (ISOs)

ISOs are statutory options subject to specific federal requirements. Exercise generally does not create regular federal wage income, but the spread can enter the AMT calculation. A qualifying sale generally requires the later of two years from grant and one year from exercise. Keep Form 3921 and separate regular and AMT basis records.

Nonstatutory stock options (NSOs)

Most NSOs do not have a readily determinable value at grant. When exercised, the spread between stock FMV and strike price is generally wage income, subject to applicable income and payroll withholding. Later price movement generally becomes capital gain or loss using the post-exercise basis.

Employee stock purchase plans (ESPPs)

A tax-qualified ESPP lets employees buy shares under a statutory plan, often at a discount. Sale timing determines whether the disposition is qualifying or disqualifying, and Form 3922 supplies important dates and values. The ordinary-income component and capital gain must be separated.

Why the distinctions matter for retirement planning

• Options require cash or a transaction method; RSUs normally do not.
• Unvested awards are contingent compensation, not current portfolio holdings.
• Private securities can remain restricted after exercise or settlement.
• Each acquired share lot needs basis and acquisition-date evidence.
• Leaving employment can forfeit unvested awards and accelerate option decisions.

Sources

• Topic No. 427, Stock Options — Internal Revenue Service.
• Publication 525 (2025), Taxable and Nontaxable Income — Internal Revenue Service.
• Publication 551 (December 2025), Basis of Assets — Internal Revenue Service.