Employee Stock Options & RSUs
Three of the most common forms of equity compensation are Non-Qualified Stock Options, Incentive Stock Options, and Restricted Stock Units. Each one is structured differently and is taxed differently, both at the federal level and in Oregon.
Stock Options Comparison
What is a Non-Qualified Stock Option (NQSO)?
A Non-Qualified Stock Option gives an employee the right to purchase company shares at a set exercise price. The employee chooses when to exercise after the option vests, and there is no annual dollar limit on the value of NQSOs an employer can grant. When an NQSO is exercised, the spread between the exercise price and the fair market value is taxed as ordinary income, with payroll tax withholding handled by the employer. If the shares are later sold, any additional gain or loss is treated as a capital gain or loss based on the holding period.
What is an Incentive Stock Option (ISO)?
An Incentive Stock Option also gives an employee the right to purchase shares at a set price, but the tax treatment is meaningfully different. ISOs are limited to $100,000 of value first becoming exercisable per employee per year. There is no regular income tax owed at exercise, but the spread is treated as a preference item for the Alternative Minimum Tax. If the shares are held at least two years from the grant date and one year from the exercise date, the entire gain at sale qualifies for long-term capital gains treatment. Selling earlier triggers a disqualifying disposition, and the spread is taxed as ordinary income.
What is a Restricted Stock Unit (RSU)?
A Restricted Stock Unit is a promise from an employer to deliver shares once vesting requirements are met. There is no purchase price and no exercise decision. When the units vest and shares are delivered, the fair market value is taxed as ordinary income with payroll tax withholding. After vesting, any additional gain or loss when the shares are sold is treated as a capital gain or loss based on holding period.
Tax Treatment Timing Comparison
ESOs Timing Step by Step
Whether stock options become valuable depends on timing decisions made at four points in their life cycle. Understanding each stage helps Oregon employees and employers set expectations and avoid surprises at tax time.
Options: Step by Step Process
Step 1. Granting
Oregon employers can include stock options in an employee's compensation package as part of the offer or as a later addition. Receiving a grant does not create a taxable event for any of the three types covered above. The grant simply establishes the terms: how many shares, what exercise price (for options), and what the vesting schedule looks like.
Step 2. Vesting
Vesting schedules give employers a way to reward tenure and performance. A typical schedule includes a one-year cliff, after which options begin vesting on a monthly or quarterly basis until fully vested. NQSOs and ISOs cannot be exercised until they vest. RSUs become taxable income at vesting because the shares are delivered at that point.
Step 3. Exercise
Once vesting requirements are met, an employee can exercise NQSOs or ISOs by paying the exercise price for the shares. The decision of whether and when to exercise depends on factors including the difference between exercise price and fair market value, holding period requirements, AMT exposure, the cash needed to exercise, and overall portfolio concentration. Leaving the company typically starts a short window (often 90 days) to exercise vested options or forfeit them. RSUs do not require an exercise decision.
Step 4. Tax Implications
Tax treatment depends on the type of equity, the holding period, whether AMT applies, and how the shares are eventually sold. NQSO and RSU income is reported on the W-2 with payroll tax withholding. ISO exercises are reported on Form 3921 and may require an AMT adjustment on Form 6251. Capital gains from selling shares are reported on Schedule D and may be subject to long-term or short-term rates depending on the holding period. Oregon taxes capital gains as ordinary income at rates up to 9.9%, with no preferential long-term rate at the state level.
For a side-by-side view of how stock options and RSUs differ at each step, see the comparison graphic in the previous section.
Oregon Employer Considerations
Equity compensation can help Oregon employers attract and retain talent, but each form has trade-offs. The right choice depends on company stage, employee mix, administrative capacity, and the role equity is meant to play in total compensation.
Which Compensation is Right for Your Business?
When NQSOs make sense
NQSOs are flexible. They can be granted to employees, contractors, advisors, and board members, and there is no annual dollar limit. They are often a fit for early-stage companies that want to share upside broadly without the eligibility restrictions of ISOs. The trade-off is that recipients owe ordinary income tax at exercise on the spread, regardless of whether they have sold any shares, which can create a cash crunch at exercise time. NQSOs are also only valuable as an incentive if recipients understand how they work.
When ISOs make sense
ISOs are limited to W-2 employees and have strict statutory requirements, including the $100,000 annual exercisable limit and a maximum 10-year term. The benefit is the potential for long-term capital gains treatment on the entire gain if holding period requirements are met. The trade-off is AMT exposure at exercise and the planning required to manage it. ISOs tend to be a better fit when the company expects employees to hold shares through a liquidity event and when the workforce includes employees who can absorb AMT planning complexity.
When RSUs make sense
RSUs are simpler to administer than options and have intrinsic value the moment they vest, since there is no exercise price to pay. Employees do not have to decide when to exercise or come up with cash to do so. RSUs tend to fit later-stage private companies and public companies, where the share value is more stable and employees value certainty over upside. The trade-off is that RSUs are taxed at vesting, even if the employee does not sell the shares, which can create withholding and cash flow questions for both employer and employee.
Oregon Employee Considerations
Oregon employees holding stock options or RSUs face a layered tax picture. Federal rules govern AMT and capital gains classification. Oregon rules govern how that income is taxed at the state level, and the state's treatment of capital gains is different from the federal treatment.
How the Alternative Minimum Tax can apply to ISOs
The AMT is a parallel tax calculation. Most taxpayers calculate their tax under the regular system and do not owe AMT. Exercising a significant number of ISOs and holding the shares past December 31 can change that, because the spread between exercise price and fair market value at exercise is treated as a preference item under AMT, even though it is not income under the regular system. The taxpayer pays the higher of the two calculations.
Common AMT preference items and adjustments include:
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Exercising ISOs and holding the shares past year end
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Large state and local tax deductions added back for AMT
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Certain depreciation adjustments for business or rental property
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Tax-exempt interest from certain private activity bonds.
If AMT is paid in one year, an AMT credit may be available in future years when the regular tax exceeds the tentative AMT.
ISO holding periods and qualifying dispositions
To qualify for long-term capital gains treatment on the entire ISO gain, two holding periods must both be satisfied: at least two years from the grant date, and at least one year from the exercise date. Selling before either threshold creates a disqualifying disposition, and the spread is taxed as ordinary income instead.
How Oregon taxes capital gains
Oregon does not have a separate capital gains tax. Capital gains are taxed as ordinary income at Oregon's marginal rates, which range from 4.75% up to 9.9% as of the 2026 tax year. This is true for both short-term and long-term gains. Federal long-term capital gains rates range from 0% to 20% based on income, plus a 3.8% Net Investment Income Tax for higher earners. Federal short-term gains are taxed at ordinary rates of 10% to 37%.
The combined federal and Oregon impact can be a meaningful portion of any stock option sale, which is why timing and holding period decisions matter. Sources: IRS Topic No. 427 and Oregon Department of Revenue.
Section 1202 and qualified small business stock
Section 1202 of the Internal Revenue Code allows holders of Qualified Small Business Stock (QSBS) to exclude a portion of the gain from federal capital gains tax when stock is held long enough and meets the QSBS requirements. Recent federal legislation has updated the exclusion percentages and gain caps, so a tax professional should confirm current rules for any specific transaction. Oregon generally conforms to the federal QSBS exclusion. Source: IRC Section 1202 (Cornell Legal Information Institute)
A Eugene Oregon Example
The following is a hypothetical example for educational purposes only and does not represent any specific client situation. Outcomes will vary based on individual circumstances. Consult a qualified financial adviser and tax professional before making decisions about stock options.
Sarah and Marie work at a tech startup in Eugene. They are both granted ISOs that vest over four years, with a readily ascertainable fair market value. After four years they are fully vested and considering whether to exercise. They learn that the spread between exercise price and fair market value at exercise counts as a preference item for AMT, even though it is not income under the regular tax system, and that they would owe the higher of the two calculations.
After speaking with a financial adviser, Sarah and Marie consider several factors: whether to exercise in a year when their other income is lower, whether to sell shares within the year of exercise to avoid AMT (and accept ordinary income treatment instead), whether to hold long enough for a qualifying disposition, and whether to use exercise financing to cover AMT in the year of exercise. They also weigh concentration risk in a single employer's stock and what happens if they leave the company before an IPO.
The right answer is different for each of them based on income, cash on hand, and risk tolerance, which is why working through the options before exercise is more useful than reacting at tax time.