Why the type of equity matters
Two employees at the same company can walk away from the same IPO with very different tax bills. The difference is usually not the dollar amount. It's what kind of equity they held and when each taxable moment happened.
Every type of equity has up to four moments that matter:
- Grant: the company promises you equity.
- Vest: you earn it by staying employed.
- Exercise or settlement: you actually receive shares.
- Sale: you turn shares into cash.
Which of these moments is taxed, and how, depends on the type.
RSUs (restricted stock units)
- Taxed at: settlement, when shares are delivered to you (usually at vest).
- How: the full value of the shares is ordinary income, just like salary. It appears on your W-2.
- Withholding: yes, usually a flat 22% federal (37% above $1,000,000). That is often less than you actually owe.
- At sale: any growth after settlement is a capital gain.
Read more: How RSUs are taxed · The RSU withholding gap · Double-trigger RSUs at IPO
NSOs (non-qualified stock options)
- Taxed at: exercise.
- How: the spread (market value minus your strike price) is ordinary income. For employees it goes on the W-2 with withholding.
- At sale: growth after exercise is a capital gain.
Read more: How NSOs are taxed
ISOs (incentive stock options)
- Taxed at: usually only at sale, for regular tax.
- The catch: the spread at exercise counts for the alternative minimum tax (AMT). A large exercise can trigger AMT even though you received no cash.
- Best case: hold the shares at least 2 years from grant and 1 year from exercise, and the entire gain is taxed at long-term capital gains rates.
Read more: How ISOs are taxed · ISOs and the AMT · Early exercise and 83(b)
Selling your shares
Once you own shares, the rules are the same no matter where they came from:
- Held more than one year → long-term capital gains (0%, 15% or 20%, plus 3.8% net investment income tax for high earners).
- Held one year or less → short-term gains, taxed like salary.
- Nothing is withheld on a stock sale. You pay through estimated taxes.
Read more: Long-term vs short-term gains · No withholding on stock sales · Estimated taxes and safe harbor
Life events that change the math
- The IPO and lockup: Planning your first sale after lockup
- A tender offer before IPO: How tender offers are taxed
- Moving states: How equity income is sourced
- Leaving the company: Your option exercise deadline
- Big gains on early shares: QSBS explained
The five most expensive mistakes
- Assuming withholding covered it. The flat 22% withheld on RSUs is often 10 to 15 points too low for high earners.
- Forgetting stock sales have no withholding. The bill arrives in April, with a penalty.
- Exercising ISOs without modelling AMT. A cashless tax bill can exceed what you can pay.
- Selling a few weeks before the one-year mark. That turns a 20% rate into 37%.
- Letting options expire after leaving. Most plans give you 90 days.
Run your numbers
The EquityTax Pro calculator models all of this for your grants: salary, state, filing status, and how much tax was already withheld.
General information, not tax advice.
Frequently asked questions
How are RSUs taxed for employees?
RSUs are taxed at settlement when shares are delivered to you, which usually happens at vest. The full value of these shares is treated as ordinary income and appears on your W-2. While companies typically withhold a flat 22% for federal taxes, this amount is often lower than the actual tax liability for high earners.
Are NSOs taxed differently than RSUs?
Yes, NSOs are taxed at the moment of exercise rather than settlement. The taxable amount is the spread, which is the difference between the market value of the shares and your strike price. This spread is considered ordinary income and will be reported on your W-2 with taxes withheld.
What are the tax risks of exercising ISOs?
While ISOs are generally only taxed at the time of sale for regular income tax, the spread at exercise counts toward the alternative minimum tax. This means you can trigger a significant tax bill even though you received no cash from the exercise. Modeling this impact is essential to ensure you can afford the potential liability.
How is the profit from selling startup shares taxed?
If you hold shares for more than one year, your profit is taxed at long-term capital gains rates of 0%, 15%, or 20%. Selling shares held for one year or less results in short-term gains, which are taxed like salary. Remember that nothing is withheld on stock sales, so you must pay taxes through estimated payments.
Official sources (for the detail-minded)
- IRC Section 83When stock you get for work becomes taxable income
- IRC Sections 421–422Special rules for incentive stock options (ISOs)
- Treas. Reg. Section 1.83-7How non-qualified stock options (NSOs) are taxed
- IRC Sections 55–56The alternative minimum tax (AMT) and the ISO adjustment
- IRC Sections 1(h), 1222Capital gain rates and short- vs long-term holding periods
- IRS Publication 525IRS guide to taxable income, including stock options and restricted stock
Run your own numbers
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Keep reading
Too Little Tax Taken Out? How to Spot and Fix Underwithholding
Your employer withholds a flat 22% on most equity income, but your real rate can be far higher. Here's how to spot the gap and close it.
Penalties for Paying Tax Late: Underpayment, Late-Payment and Late-Filing
Three different penalties can apply when tax is paid late. Here's what each costs and how the safe harbors keep you clear.
How commissions and bonuses are taxed and withheld
A commission check isn't taxed at a special rate, but it's withheld differently from your salary. Here's why big checks can look over-taxed, and why you may still owe in April.
How ESPP shares are taxed
Your ESPP discount is taxed when you sell, not when you buy. How much counts as salary depends on how long you held the shares.
Estimates only. Not tax, legal, or investment advice. See our methodology