Your equity grant uses one of three common structures, and each is taxed completely differently. Knowing which one you have changes how you plan vesting, sales, and exit timing.

The first thing to figure out about your equity grant is which of the three common structures you have — RSUs, ISOs, or NQSOs — because they look similar on the surface but are taxed in very different ways under the federal tax code. Your offer letter mentions equity; somewhere in the grant documents — usually a PDF with 30+ pages — it tells you what kind you actually have. The structure generally determines when tax is owed, how much, and what counts as a "good" decision when you sell. The specifics depend on your situation, and these rules and figures can change.

What are RSUs, ISOs, and NQSOs?

RSUs (Restricted Stock Units): A promise to deliver shares on a vesting schedule. When shares vest, the IRS generally treats their full value as ordinary income — whether you sell or not. Most public-company grants are RSUs.

ISOs (Incentive Stock Options): The right to buy shares at a fixed price (the "strike price"). The IRS generally imposes no regular tax when you exercise (unless AMT applies — see below). If you hold the shares for the right period after exercise, the IRS generally allows gains to be taxed at long-term capital gains rates. Common at early-stage startups.

NQSOs (Non-Qualified Stock Options): Like ISOs, but the IRS generally treats them less favorably. The spread between strike price and fair market value at exercise is generally taxed as ordinary income.

When is each structure taxed?

How each plays out depends on your situation, and the figures below can change:

For RSUs:

Tax is generally withheld at vest, usually by selling enough shares to cover the bill ("sell-to-cover"). The employer-default withholding rate is often below a person's actual marginal rate, so many people find they owe more at tax time.
If the stock price drops after vesting, you've generally already paid ordinary income tax on a higher value than what you can now sell for.

For ISOs:

Exercising generally creates a potential Alternative Minimum Tax (AMT) event — the IRS counts the "bargain element" (FMV minus strike price) as AMT income on Form 6251, even though no regular tax is owed.
To get long-term capital gains treatment, the IRS generally requires holding the shares 2 years from grant and 1 year from exercise. This is the "qualifying disposition" rule.

For NQSOs:

Tax generally hits at exercise, not at vest. The IRS treats the spread as ordinary income, and the employer typically withholds.
Subsequent appreciation after exercise is generally taxed as capital gains.

What is the 83(b) election — and when does the window close?

If you receive restricted stock (not standard RSUs) or you early-exercise options before they've vested, the tax code lets you file an 83(b) election to be taxed on the value now, at grant/exercise, instead of as the shares vest. The bet: if the stock is worth very little today, you pay tax on a tiny amount now and start the long-term capital-gains clock early, rather than paying ordinary income tax on a (hopefully much larger) value at each future vesting date.

What makes it high-stakes is the mechanics, not the math:

It's time-boxed — the IRS requires the election to be filed within a strict, short window after the grant/exercise date (commonly cited as 30 days). Miss it and the option is gone for that grant; there's generally no retroactive filing.
It's irreversible — if the stock later falls to zero, you generally don't get the tax back.
It generally doesn't apply to standard RSUs, which have their own (no-election) treatment.

Because the deadline is unforgiving and eligibility depends on your exact grant type, this is the classic case where people confirm the current filing window and whether they even qualify with a tax advisor before the clock runs out.

How does AMT play out with ISOs?

The ISO "no regular tax at exercise" rule has an asterisk: the Alternative Minimum Tax. When you exercise and hold ISOs, the IRS counts the bargain element (fair market value minus strike price) as income for AMT purposes on Form 6251 — so you can owe AMT in the exercise year on a paper gain, even though you sold nothing and owe no regular tax. The AMT you pay can often be recovered later as an AMT credit, but the cash-flow hit lands in the exercise year. The exemption amounts and phase-out thresholds that decide whether you actually owe are re-set by the IRS most years, so the real question — "how many ISOs can I exercise this year before triggering AMT?" — is a current-year calculation many people run with a CPA rather than from a rule of thumb.

What sets your strike price (Section 409A)?

For private companies, Section 409A is the rule behind the "409A valuation" referenced in your grant. It generally requires options to be granted with a strike price at least equal to the stock's fair market value at grant — and because private shares have no public price, the company commissions an independent 409A appraisal to set it. Why it matters to you: a strike priced below FMV can expose the option to 409A's deferred-compensation penalties (additional tax on top of ordinary income), and a stale or aggressive valuation can be challenged. When the company refreshes its 409A (typically annually, or after a financing round), the strike price on new grants moves with it. Asking for the current 409A valuation tells you how much room there is between your strike and today's FMV.

When should you get professional tax advice?

Many people bring in a professional when:

They're holding ISOs at a startup and considering early exercise.
They expect a large RSU vesting cliff (4-year cliff release or annual refresh stacking).
Their company just went public and they're deciding when to sell.
They're exercising NQSOs near year-end.

These situations can shift a tax bill by tens of thousands of dollars based on timing decisions. Many people find that a CPA who specializes in equity compensation pays for themselves.

What should you look for in your grant documents?

The structure (RSU, ISO, NQSO, or something else like RSAs or SARs).
The vesting schedule and cliff dates.
The strike price (for options) — and how it compares to the current 409A valuation.
The expiration date for options (usually 10 years from grant, but truncates fast if you leave the company — often only 90 days post-termination, unless your plan extends this).
Acceleration clauses in the event of acquisition, IPO, or termination without cause.

What should you ask HR or legal?

Does my company offer early exercise for ISOs? (Can dramatically reduce future AMT and start the long-term holding clock early.)
What's the post-termination exercise window if I leave?
Is the grant single-trigger or double-trigger for acceleration?
Can I get a copy of the most recent 409A valuation?

Official sources

Because these thresholds and figures can change, many people confirm the current rules at the source for their situation:

Reading Your Equity Grant — RSUs, ISOs, NQSOs