RSU & Stock Option Taxation
RSUs are taxed as ordinary income when they vest, at the share value on that date, and that amount becomes your cost basis. Options differ: non-qualified options are taxed at exercise, while incentive stock options may trigger alternative minimum tax instead. Blue Sage handles the reporting and the planning around both.
What's included
- RSU vesting income and withholding review
- Cost basis correction on shares sold after vesting
- ISO exercises and alternative minimum tax modeling
- Non-qualified option exercise and sale reporting
- Employee stock purchase plan disqualifying and qualifying dispositions
- Multi-state sourcing where vesting spanned more than one state
- Sale timing and concentration planning
- Estimated tax adjustments so a large vest does not create a penalty
Who this is for
Employees at public and pre-IPO companies who receive equity as a meaningful part of their compensation. Also anyone whose employer withheld at a flat supplemental rate on a large vest and is now facing a balance due that nobody warned them about.
The most valuable work here is usually before the transaction rather than after — deciding when to exercise, whether an early exercise makes sense, and how much AMT exposure an ISO exercise would create.
Deadlines and rules worth knowing
| Item | What applies |
|---|---|
| RSUs | Ordinary income at vest, valued at the share price that day. That value becomes your cost basis. |
| Non-qualified options | Ordinary income at exercise on the spread between strike price and fair market value |
| Incentive stock options | No regular tax at exercise, but the spread is an alternative minimum tax adjustment |
| ESPP | Discount is generally ordinary income; the treatment depends on how long you hold after purchase and after grant |
| The double-taxation trap | Broker forms frequently report a cost basis that omits the income already taxed at vest, causing you to pay twice on the same amount |
| Withholding | Employers often withhold at a flat supplemental rate that is below the top marginal rate, leaving a shortfall |
| State sourcing | Equity is often sourced to where you worked during the vesting period, not where you live when you sell |
How we work
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Review what exists
We read last year’s return and whatever records you have. Most of what needs fixing is visible quickly.
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Fixed quote in writing
Scope and price before anything starts, counting entities, states, and any cleanup needed.
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File and maintain
Returns prepared and filed, notices answered, and a projection before year end.
Questions
Why did I pay tax twice on my RSUs?
This is the most common equity compensation error. When RSUs vest, the value is already taxed as ordinary income through your W-2. Brokers often report the sale with a cost basis of zero or the discounted purchase price, so the same amount gets taxed again as capital gain. The basis has to be corrected on the return.
Do I owe tax when I exercise incentive stock options?
Usually no regular income tax at exercise, which is the advantage of an ISO. However, the spread between your strike price and the fair market value is an adjustment for alternative minimum tax purposes, and a large exercise can create a substantial AMT bill in a year when you have received no cash. This should be modeled before you exercise.
My employer withheld on my RSU vest. Is that enough?
Often not. Employers commonly withhold at a flat supplemental wage rate, which for high earners is below their actual marginal rate. A large vest can therefore leave a significant shortfall that shows up as a balance due plus an underpayment charge. Adjusting withholding or estimates in the same year prevents it.
Last reviewed 11 September 2026 by Fahadun Nabi, Founder, Blue Sage Tax and Accounting Inc.. General information, not advice for your specific situation.
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