Stock Options and RSUs in Israel — A 2026 Tax Guide

Tax year 2026 · ~7 min read

If you're a hi-tech employee, you've seen "RSU", "ESPP", or "options" in a comp letter. Israel's stock-comp tax regime is one of the most generous in the world — if you and your employer use it correctly. This article explains the rules.

The two tracks: §3(i) vs §102

Israeli tax has two paths for taxing employee equity:

Section 3(i) — the default. Treats equity as ordinary employment income, taxed at your marginal rate (up to 50%) plus Bituach Leumi. Applies when there's no special arrangement — usually contractors, board members, or non-Israeli employees of foreign parent companies.
Section 102 — the preferential regime. Designed for employees of qualifying Israeli companies. Within Section 102 there are two sub-tracks: trustee and non-trustee. The trustee track is where the magic happens.

Section 102 with trustee — the capital-gains track

For RSUs, options, and ESPP grants channeled through a trustee (typically Bank Hapoalim, Bank Leumi Trust, ESOP-Excellence, IBI, or similar):

Vesting / exercise is not a taxable event. No tax owed when shares vest.
Sale triggers tax. If the shares were held by the trustee for at least 24 months from grant, the gain qualifies as a capital gain (25%, or 30% for "significant shareholders" with ≥10% holdings) instead of ordinary income.
A portion of the sale proceeds is still taxed as ordinary employment income (the "ordinary-income portion"). For RSUs, this portion equals the Fair Market Value (FMV) on the grant date — typically small for high-growth companies. For options with strike = FMV-at-grant, the ordinary-income portion is near zero.
The 25% rate applies to the rest of the gain — the appreciation above the ordinary-income portion, not the full sale value.

In effect: a hi-tech engineer at a public company who held vested shares for 24+ months pays roughly 25% on appreciation versus the marginal 47% + Bituach Leumi that would otherwise apply. The savings on a typical hi-tech vesting year run into tens of thousands of shekels.

Without trustee — ordinary-income track

If shares aren't held by a trustee for the full 24 months — for example, you sold early or your employer never enrolled you in a trustee program — the entire gain is ordinary income at your marginal rate. This is the most common pitfall: people who leave their employer and sell within 24 months of grant often lose the capital-gains rate.

RSUs vs options vs ESPP

RSUs (Restricted Stock Units): shares granted that vest over time. Most common at public hi-tech companies. With Section 102 + trustee, the 24-month clock starts on the grant date, not the vest date.
Stock options (Non-Qualified Options or Incentive Stock Options, in US terminology): right to buy at a strike price. Same Section 102 rules. The gain is sale price minus strike. If the strike equals fair-market-value at grant, the "ordinary-income portion" can be near zero.
ESPP (Employee Stock Purchase Plan): typically a discounted purchase of employer stock. The discount itself is ordinary income; the post-purchase gain follows Section 102 rules.

When tax is actually withheld

For Section 102 + trustee:

No withholding at vesting.
At sale, the trustee or your broker withholds the applicable tax — 25% on the capital-gain portion, ordinary-rate withholding on the FMV-at-grant portion.
The withheld amount is reported in your annual employment summary (Form 106) and the trustee's annual report.

For Section 3(i) or non-trustee: tax is withheld at vest / exercise as if it were salary, and shows up on your tlush (pay slip) as שווי הטבה (benefit value) or a similar line.

Common pitfalls

Selling within 24 months of grant. Even if vested, you lose the 25% rate.
Leaving the company. Some employers transfer shares out of the trustee program when you leave — check the termination paperwork before signing.
Forgetting Bituach Leumi. The 25% capital-gain track is exempt from Bituach Leumi (BL) and health tax. The marginal-rate ordinary-income track is not.
Multi-country residence. If you've been a US tax resident at any point during vesting, you may owe US tax on a portion. This article covers Israeli rules only.
ESPP discount. Always taxed as ordinary income — even within Section 102 + trustee.

Bottom line. For a typical Israeli hi-tech employee at a public company under Section 102 + trustee: vesting isn't taxable; sale 24+ months after grant means 25% on appreciation; sale before 24 months falls to your marginal rate. If your employer doesn't run a trustee program, your equity is taxed less favourably — worth raising with HR or your accountant during compensation discussions.

Stock-compensation tax is fact-specific, especially when you have dual tax residency or your employer's Section 102 election isn't clear. For your specific equity grant, consult a licensed Israeli accountant or tax attorney before you sell.