Restricted stock units (RSUs)
Nothing happens when RSUs are granted. When they vest, the value of the shares on the vest date is wages, the same as salary. It is on your W-2, and Social Security, Medicare and income tax are withheld, usually by selling some of the shares, called sell to cover.
- Your cost basis is the vest-date value. You already paid tax on it as wages, so only the change in price after vesting is a capital gain or loss.
- The holding period starts at vest. Sell more than a year after the vest date and any gain is long-term.
- Selling right at vest adds almost no tax. The price has barely moved from your basis.
Non-qualified stock options (NSOs)
NSOs are not taxed when granted. When you exercise, the spread, meaning the market price minus your exercise price times the number of shares, is wages. It shows up on your W-2, with the amount also in box 12 under code V. Your basis in the shares is the market price on the exercise date. If you exercise and sell the same day, called a cashless exercise, the spread is wages and the sale itself shows almost no gain.
Incentive stock options (ISOs)
ISOs, also called qualified or statutory options, get the best treatment and have the most rules. Your employer sends a Form 3921 for each exercise.
- No regular tax at exercise. But the spread is added to income for the alternative minimum tax. A large exercise can create AMT even though you sold nothing. For 2026, the AMT exemption is $140,200 for married couples filing jointly and $90,100 for single filers, and it starts phasing out at $1,000,000 and $500,000 of income.
- A qualifying sale. Hold the shares at least two years from the grant date and one year from the exercise date, and the entire gain over your exercise price is a long-term capital gain.
- A disqualifying sale. Sell sooner and the spread at exercise, or your actual gain if smaller, becomes ordinary income. Social Security and Medicare do not apply to it.
- AMT comes back to you. AMT you pay because of an ISO exercise usually becomes a credit you can use in later years, on Form 8801.
- The $100,000 limit. ISOs worth more than $100,000 at grant that first become exercisable in the same year are treated as NSOs.
A worked example
Isabella lives in Bergen County and works for a technology company. She and her husband file jointly and have $317,800 of taxable income before her stock pay. In 2026, 1,600 of her RSUs vest at $125 a share.
| RSU wages: 1,600 shares × $125 | $200,000.00 |
| Federal tax withheld at 22% | $44,000.00 |
| Federal tax on that $200,000 at 24%, 32% and 35% | $57,300.50 |
| Still owed in April | $13,300.50 |
The flat 22% rate is the law for supplemental pay up to $1 million, but Isabella’s stock income lands in the 24%, 32% and 35% brackets. Without an estimated payment or extra withholding, she owes $13,300.50 in April and may owe an underpayment penalty on top. New Jersey withholding often falls short the same way.
A year and a half later, Isabella sells the remaining 1,000 shares at $130. Her brokerage 1099-B shows the sale but leaves the cost basis at zero.
| Gain if the return uses the 1099-B as reported: $130,000 − $0 | $130,000.00 |
| Correct gain: $130,000 − $125,000 basis | $5,000.00 |
| Gain reported twice | $125,000.00 |
| Extra federal tax at 15% plus the 3.8% investment tax | $23,500.00 |
The $125,000 was already taxed as wages when the shares vested. The fix is a basis adjustment on Form 8949 using the supplemental statement from the brokerage. The same thing happens with NSOs: for options granted since 2014, brokers are not allowed to include the wage part in the basis they report.
New Jersey and New York
- New Jersey taxes RSUs and NSOs as wages. New Jersey has no AMT, so exercising ISOs does not create New Jersey tax at exercise.
- Working in New York. New York taxes the part of your stock pay earned while you worked there, measured from the grant date to the vest date. New Jersey gives you a credit for the New York tax, so the income is not taxed twice, but both returns have to agree.
- Moved out of New York? RSUs that vest after you move can still be partly New York income. New York looks back at where you worked during the vesting period.
Moves worth planning
- Before a large vest or exercise, run a projection and make an estimated payment, or raise your W-4 withholding, to close the gap.
- Exercise ISOs early in the year. If the stock drops before December 31, a same-year sale can undo the AMT.
- Give appreciated shares held more than a year to charity, instead of cash, to skip the capital gain.
- Keep every vest and exercise confirmation. They are the proof of your basis.
This guide is general information based on the law as of the date above, not advice for your situation. Tax rules change, and the right answer depends on your numbers.