Stock-based benefits like restricted stock units (RSUs) and stock options may be a major part of your total pay package. But how they work, their tax implications and their potential value can differ significantly. Understanding the key features of RSUs and stock options could help you determine how to take full advantage of the incentives in your compensation.
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Understanding RSUs and stock options
RSUs and stock options are types of equity compensation that employers may offer to attract and retain talented employees. The value of these incentives is tied to the company’s stock performance, which help to align workers’ interests with the company. If the company succeeds, workers holding company stock may also benefit.
What are restricted stock units?
With restricted stock units, or RSUs, a company agrees to give shares to the employee over the course of a vesting period, and perhaps after meeting other stipulations. Once the shares vest — typically in batches over several years — ownership of the shares transfers to the employee at no out-of-pocket cost. At that point, the employee can opt to sell or hold the shares.
» Estimate the value of your shares with our RSU calculator
What are stock options?
With stock options, a company promises to sell a certain number of shares to an employee at a set price, known as the strike price. Stock options also tend to have a vesting period. Once the shares vest, the employee has the right to purchase those shares at the strike price. This step is known as exercising the options, and it can occur any time until the options expire (typically up to 10 years after the options are granted).
There are two kinds of stock options.
» MORE: How stock option taxes work
RSUs vs. stock options
Consider the key differences between RSUs and stock options.
Restricted stock units (RSUs) | Stock options | |
|---|---|---|
Are there upfront costs? | No. Employees receive shares once they vest. | Yes. Employees receive the right to purchase shares at a set price once they vest. |
What are the typical stages? |
|
|
What is the value based on? | The market price. Because you don’t pay to acquire the shares, they’ll always have some value, unless the share price of your company goes to $0. | The bargain element — that is, the difference between the strike price and the market value of the shares at the time they’re exercised. Because you pay to acquire the shares, they’ll only have value if the strike price is lower than the market price. |
How are they taxed? | The market value of the vested shares is taxed as ordinary income. You may also be taxed on any capital gains when you sell. | ISOs: Taxes are deferred until you sell your shares, though you may face alternative minimum tax at the time you exercise. If you meet certain holding period requirements when you sell, any profit from the sale may be taxed at the typically lower capital gains tax rate. NSOs: The bargain element is taxed as ordinary income. You may owe capital gains tax when you sell. |
When are taxes owed? | When the shares vest. This means employees don’t have the ability to time the tax event. You may also owe capital gains tax later if you sell the shares. | When you exercise your options. This means employees have some ability to time the tax event. You may also owe capital gains tax later if you sell the shares. |
Do they expire? | No. Any vested RSUs remain yours, even after you leave the company. | Yes. Options typically must be exercised within 10 years from the date they’re granted. When you leave a company, you may have to exercise any vested options within 90 days. |
What’s the risk level? | Lower risk because they require no upfront cost and will retain some value unless the share price goes to $0. | Higher risk because they require some upfront cost, could expire, and could lose all value if the market price is lower than the strike price. |
Ask an advisor: Which is better?
Stock options and RSUs each have their advantages and disadvantages. But there could be circumstances in which one is more helpful than the other, says Daniel Messeca, a certified financial planner and co-founder of Craftwork Capital in Alexandria, Virginia.
RSUs follow predictable timelines. They’re not risk-free but they’re less risky because the employee doesn’t have to buy shares like they do with stock options and will retain some value unless the share price goes to $0. That makes them a potential source of cash to meet your financial goals. “If I'm trying to fund education for my children, I know when an RSU vests, I have the net of those shares, I can sell them right away and pay for school or invest them in another fund,” Messeca says.
But if your equity compensation acts more like a bonus or a potential windfall — something you’re not counting on to meet day-to-day needs — the reward can be worth the risk. That’s why startups and other companies with high-growth potential might use stock options to attract top talent.
“If I'm in the investor mindset and in good shape, doing everything I need to do, maybe I'm more willing to focus my efforts on options because my potential upside is very large there,” Messeca says.
Other considerations for RSUs and stock options
While the risk associated with RSUs and stock options may be a key factor to weigh, it’s not the only one. To assess the value of RSUs or stock options from your employer (or prospective employer), gather the specific details of the plan, including:
- The value of the company today. This can give you an idea of what your equity compensation might be worth. Though it’s important to keep in mind that the value likely will change during the vesting period.
- The vesting schedule. You’ll want to know when you actually gain a right to the shares.
- How readily you could sell the shares. In public companies, selling shares is pretty straightforward. But private companies might have additional stipulations or fewer opportunities to sell any stock you acquire. It could make the tax implications more or less attractive.
And for options, be sure to assess:
- The strike price and how it compares to the current value.
- Whether it’s an ISO or NSO. That will affect how your shares are taxed.
- Whether your company offers cashless exercising. Some companies permit employees to exercise their options without paying any upfront costs. Instead, the company is reimbursed out of the proceeds of the stock sale.
» Need help? View a full list of the best financial advisors
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NWWP is an SEC-registered investment adviser. Registration does not imply skill or training. The calculator is provided for informational and educational purposes only.
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- 1.IRS. Equity (stock)-based compensation audit technique guide. Accessed Oct 27, 2025.
- 2.National Archives and Records Administration. 26 CFR § 1.422-2. Accessed Oct 27, 2025.
- 3.IRS. Topic no. 427, Stock options. Accessed Oct 27, 2025.
