ISO vs RSU: Incentive type comparison

Equity packages often bundle together different kinds of rewards, and two of the most common are incentive stock options (ISOs) and restricted stock units (RSUs).

They sound related, but they're quite different. An ISO gives you the chance to buy shares later at a locked-in price, and an RSU gives you shares outright once you've earned them.

As a result, ISOs vs RSUs differ in what you pay, when you're taxed, and how much risk you take on. Here are the most important things you need to know about how they compare.

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What are ISOs?

An incentive stock option (ISO) gives you the right to buy company shares at a fixed price, set on the day you're granted the option. Companies reserve ISOs for employees, and they come with tax perks that other equity types don't offer.¹

The appeal is the payoff. If the share price rises above your fixed price, you can buy in low and, with the right timing, have your gain taxed at favorable rates down the line.

In return, you have to put up cash to buy the share and follow strict rules to hold on to their tax advantages.

What are RSUs?

A restricted stock unit (RSU) is your company's promise to give you shares once you meet certain conditions, usually by staying through a vesting schedule. There's nothing to buy and no fixed price to track.²

Once your RSUs vest, the shares are deposited into your account and belong to you. Because they turn into stock, RSUs hold some value for as long as the company's shares are worth anything, which makes them more predictable than stock options.

You're taxed on that value when the shares vest, whether or not you sell them.

ISO vs RSU: What are the differences between them?

ISOs and RSUs have different natures. An ISO is a right you have to act on by buying shares, and an RSU is a stock unit you receive automatically once it vests.

Naturally, the two split on cost, taxes, and risk. Here's how they compare.

What you receive

With an ISO, you're granted the option to purchase shares, not the shares themselves. You only become a shareholder after you exercise and pay for them. An RSU works the other way around. The shares come to you directly when they vest, with nothing to buy.

Whether you pay to get the shares

ISOs carry a fixed purchase price, so converting them into shares means spending your own money to exercise. Depending on your price and how many options you hold, that can add up to a significant amount.

RSUs cost nothing to receive, since the company grants the shares to you. You may still owe tax once they vest, but you're never paying to acquire the stock.

When you have to pay tax

RSUs are taxed the moment they vest, when their full market value counts as ordinary income for that year, with no option to defer. In turn, with ISOs, exercising them triggers no regular income tax, and taxes only come up when you sell.¹²

What happens if the stock loses value

With RSUs, since you end up holding real shares, they keep some worth even if the price falls after your grant date.

ISOs offer no floor like that. If the market price drops below your fixed purchase price, buying the shares would cost more than they're worth, which leaves your options with no practical value until the price climbs back.

Where each type is most common

ISOs and RSUs often cluster at different company stages.

Startups and pre-IPO companies lean toward ISOs, because low purchase prices give early employees a shot at large gains if the company succeeds. Bigger and public companies more often hand out RSUs, which are simpler to run and always hold value.

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ISOs vs RSUs: Tax treatment in the US

How ISOs are taxed

ISOs reward holding, and their tax treatment reflects that. You owe no regular income tax when you exercise, which is the feature that sets them apart from RSUs.

The trade-off is the alternative minimum tax, or AMT. The difference between what you pay to exercise and the shares' value that day feeds into a separate AMT calculation, which can create an additional bill.

If you hold the shares long enough, your gain can be at lower long-term capital gains rates. To qualify, you need to keep the shares for at least 2 years from the grant date and 1 year from exercise.¹

If you sell before you meet both marks, part of your gain will be taxed as ordinary income.

How RSUs are taxed

RSUs are taxed at vesting.

On the day your shares vest, their full market value is added to your income for the year and taxed at ordinary rates, the same way your salary is treated. Federal income tax, state tax, and Social Security all apply.

You also need to plan for withholding. Employers usually withhold tax on vesting RSUs at the flat 22% supplemental rate, which can fall short if your total income puts you in a higher bracket, and you'll have a difference to settle at tax time.²

After that, the shares are yours. If you hold them and they gain value, that growth is taxed as a capital gain when you sell, at the lower long-term rate if you've held for more than a year past vesting.²

FAQs

Are RSUs better than ISOs?

Neither is outright better. RSUs give you predictable value and simpler taxes, but ISOs offer more upside and potentially lower taxes if you can meet the holding rules and cover the cost to exercise. Whether RSUs or ISOs are right for you depends on your company and personal financial goals.

Do you pay tax on RSUs if you don't sell the shares?

Yes. RSUs are taxed when they vest, based on the shares' value that day, whether or not you sell. Selling later is a separate event that only adds tax if the shares have gained value since vesting.

Can I choose between ISOs and RSUs?

Usually not. Your employer decides which type of equity to grant, often based on the company's size and stage. Some companies give different equity to different roles, but it's rarely something you personally can decide on.

What happens to my RSUs if I leave the company?

Any RSUs that have already vested are yours to keep, since you own those shares. RSUs that haven't vested yet are typically forfeited when you leave, so you lose the unvested portion.

Your grant agreement should explain these terms, so make sure to read it to figure out what would happen in your situation, since different plans handle departures differently.

Are RSUs taxed twice?

No, but it can seem that way. You're taxed once at vesting on the value of the shares, and then only on any further gain if you later sell for more than that. These two taxes apply to different events and amounts, so you're not paying twice the same money.

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ISOs and RSUs are different ways for you to own a piece of the company.

RSUs become shares you own automatically and are taxed at vesting, with steady, predictable value. ISOs give you the right to buy in at a set price, with a lighter tax outcome yet more risk.

To take full advantage of both ISOs and RSUs, read your grant paperwork closely and talk to a tax advisor before any large exercise or sale.

If you sell your shares and need to move the money internationally, such as if you want to hold it as savings in another country, be aware that banks tend to charge high fees and mark up the exchange rate.

Just the currency exchange rate markup can cost you thousands of USD on a large amount.

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Sources

1. Carta - Incentive stock options
2. Carta - Restricted stock units (RSU)

Sources checked 09/17/2026