What Should I Sell First: My ISOs, NSOs, or RSUs? 

More often, executives hold not just one type of equity compensation, but two or three types, including incentive stock options (ISOs), non-qualified stock options (NSOs), and restricted stock units (RSUs). A common question they have around what to do with it is: “What should I sell first: my ISOs, NSOs, or RSUs?” 

It sounds like a simple question. And occasionally, the answer is straightforward. However, most of the time, deciding which shares to sell requires much analysis, paired with a clear understanding of what you’re trying to accomplish. It requires thoughtful equity compensation planning.  

This is done by creating a complete equity compensation plan, which typically involves a carefully laid out sequence of exercises and sales from a mixture of portions of different grants from the various types of equity compensation: ISOs, NSOs, and RSUs. 

Equity compensation plan considerations 

Crafting an equity compensation plan requires considering several interrelated factors, such as: 

• What types of equity compensation do you have? 

• What is the total value of each type (i.e., the percentage value of each)? 

• How many different grants do you have for each type? 

• How far into the vesting schedule are you for each type and each specific grant? 

• Have you early exercised any stock options? 

• Have you exercised any vested stock options (i.e., regular, not early exercised)? 

• Are any of your exercised shares eligible for Qualified Small Business Stock (QSBS) tax treatment? 

• Is your company public or private? 

• If your company is still private, how long before you expect a liquidity event? 

• If your company is public, are you subject to trading restrictions such as a post-IPO lock-up period, trading windows, or a 10b5-1 trading plan for corporate insiders? 

• If you are holding shares from stock options you previously exercised or from RSUs that vested and shares were delivered to you, how long have you held those shares and how much taxable gain would be realized per share if they were sold? 

• What will your income and tax rates be over the next few years before any extra income from equity compensation stock exercises or sales? 

• Do you have an alternative minimum tax (AMT) credit from ISO exercises in prior tax years? 

• What recent or anticipated tax law changes could affect the plan?  

• Are you considering donating any of the appreciated shares to charity (which brings a charitable tax deduction)? 

• What is the current stock price and how volatile has the stock price been? 

• What is the current stock price in relation to the strike price of your unexercised stock options? 

• Do you have financial goals that require raising cash from your equity compensation—for example, buying a new home or funding the kids’ college savings accounts? 

• How quickly would you like to diversify your holdings? 

• How much of your stock do you need to sell now to be sure you’re set for retirement? 

The first step to creating an equity compensation plan is understanding your financial goals and diversification objectives, and developing various scenarios for the exercise of options and sale of options and RSU shares that meet those goals and objectives.  

The second step is determining the total tax cost of the various scenarios over a three to four tax-year window. For many individuals, a common objective is managing the amount of tax they’ll pay when selling their stock from equity compensation and thereby maximizing the amount of after-tax proceeds they’ll receive.  

The final step is adjusting and iterating to find a good balance between minimizing tax and achieving your financial goals and diversification objectives. 

An earlier post covered important post-IPO equity compensation planning issues with multiple types of equity compensation and included a useful scenario to consider. Here’s another scenario that highlights some of what needs to be considered in this essential type of planning. 

New scenario: Exercise ISOs, sell NSOs, later sell RSUs 

Let’s say you have ISOs from the early start-up days at your company, NSOs from a few years later, and RSUs that you were granted more recently after the company went public. All of your ISOs and NSOs are fully vested, and you can exercise them anytime—no trading restrictions apply to you. You have not exercised any of your ISOs or NSOs yet. Some of your RSUs have vested, and the shares were delivered to you in your company stock plan account. You haven’t sold any of those RSU shares yet, and you’ve held them for 11 months.  

You want to raise cash to buy a new home. You also want to diversify out of one-half of the total value of your stock in two years because your financial plan says moving that amount of money to a more diversified investment portfolio may support broader long-term financial planning goals. You don’t expect any large bonuses or other changes in income for the next several years—you expect your income to remain steady. The stock has appreciated substantially, and you’re ready to start cashing it out. So, how might you begin thinking through this process? 

Since you’ve done a good job clarifying your financial goals and diversification objectives, the next step is to develop scenarios for the exercise and sale of your stock options and RSU shares. One hypothetical scenario that is sometimes discussed for illustrative purposes might involve exercising ISOs, selling NSOs to raise cash for an ISO exercise, and holding RSUs for a longer period. 

In this hypothetical scenario, you might consider exercising some or all of your ISOs to get the clock started on the one-year holding period required to qualify for the favorable long-term capital gains tax rates when you sell your shares (you’ve already met the two-year-from-date-of-grant requirement because you received your ISOs many years ago). You’ll need to come up with cash to pay the exercise price for the shares (you’re going to buy the shares and hold them for at least one year).  

You may also need cash to pay any AMT on the ISO shares. Remember, exercising ISOs doesn’t create any tax under the regular tax system, but it can create tax under the AMT system. Any AMT you pay this year will give you an AMT credit you may be able to use to offset the regular tax you pay when you sell the ISO shares after one year. 

Note: Beginning in 2026, changes under the One Big Beautiful Bill Act lowered the AMT exemption phaseout thresholds and doubled the phaseout rate, making it more likely that ISO exercises will trigger AMT and potentially at higher amounts. This makes careful modeling of the AMT impact even more important. 

Continuing the scenario, you could elect to same-day exercise and sell enough of your NSOs to raise cash to cover the total cost to exercise the ISO shares. You’ll need to sell enough NSOs to pay the strike price per share multiplied by the number of ISO shares you plan to exercise.  

The company will withhold federal tax on your NSO sales, probably at a 22% tax rate. The company will also withhold state income tax and federal and state payroll taxes. This means you’ll need to sell enough NSOs such that the after-tax proceeds (including federal and state income and payroll taxes) will be enough to pay for the ISO exercise. You won’t sell NSOs to cover the AMT generated by the ISO exercise. 

Because the AMT won’t be due until next year’s tax filing due date, and assuming no estimated tax payments will be due this year because your income will be higher than it was last year, you don’t need to raise cash immediately for the extra tax owed. You can wait a bit. You might delay selling RSU shares for a period of time, until you’ve held your RSU shares for at least one year. That way, the gain on RSU share sales will qualify for long-term capital treatment, and you’ll pay tax on those sales at the lower federal long-term capital gains tax rate.  

Once the RSU shares qualify for long-term capital gains tax treatment, you will sell enough held RSU shares to raise cash to cover the tax on the ISO exercises and any tax due on the NSO sales as a result of tax under-withholding (a common problem). You may also sell additional RSU shares to raise cash for your home purchase and to make progress on your diversification goals. You paid most of the tax due on the RSUs when they vested, but you will need to set aside cash to pay for the additional tax on RSU sales as a result of RSU share appreciation after vesting with this year’s tax return. 

Next year, once a full year has passed since exercise, you could sell the ISO shares that you exercised this year. In this example, a portion of the tax impact may already have been recognized prior to the eventual sale of the shares during this year, and you will use your AMT credit next year to offset the tax owed on the ISO share sales. The proceeds from the ISO share sales will move you closer to your diversification objective of selling half of your stock within two years. 

This is one simplified hypothetical scenario, presented solely for educational purposes, and does not represent a recommendation or expected outcome. Of course, how well it works—the amount of tax saved, the amount of cash raised, and the diversification achieved— depends on the specific facts and circumstances. The devil is in the details. In the same way, the specific facts and circumstances of your particular situation will be important in your decisions about what to sell when. There is no one-size-fits-all answer. 

As you can appreciate with this example, many factors must be considered to create a workable plan and answer the question, “What should I sell first?” 

Savant Wealth Management provides holistic wealth management services including financial planning, equity compensation planning, investment management, tax planning, and others as a fiduciary, acting in clients’ best interests. If you’re interested in learning more about how equity compensation planning fits into a broader financial planning discussion, schedule a complimentary consultation. 

This is intended for informational purposes only. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment or tax advice from Savant. Please consult your investment or tax professional regarding your unique situation.