Equity compensation, like stock options, RSUs, and ESPPs, can be an incredible opportunity to build wealth, but it can also be a minefield of tax surprises if you’re not paying attention. Whether you’re an early employee at a startup or receiving grants at a public company, thoughtful tax planning is essential to making the most of your equity.
Know What Type of Equity You Have
Before you can plan anything, it’s critical to understand what kind of equity you’re working with. Each type is taxed differently:
- Incentive Stock Options (ISOs): Potentially favorable tax treatment, but can trigger AMT.
- Non-Qualified Stock Options (NSOs): Taxed as ordinary income when exercised.
- Restricted Stock Units (RSUs): Taxed as ordinary income when they vest.
- Employee Stock Purchase Plans (ESPPs): Often eligible for special tax rules and discounts.
Each of these has different implications for when you pay tax and how much you pay.
Timing Is Everything
A common mistake is assuming you only need to worry about taxes when you sell. In reality, tax consequences often start when you’re granted or exercise your equity, not when you cash out. The value of your stock at each of those points may trigger income or AMT taxes, even if you don’t see any actual cash.
Early Decisions: Should You File an 83(b) Election?
If you receive restricted stock or early-exercise your stock options, you may have the option to file a Section 83(b) election. This tells the IRS you want to be taxed on the value now, rather than later as it vests.
Why would you do this?
- If the current value is very low, you pay minimal tax now.
- All future growth can be taxed as long-term capital gains, potentially saving you a lot down the road.
But it’s a use-it-or-lose-it strategy. If the stock drops in value or you leave before vesting, you don’t get your taxes back. The decision must be made within 30 days of receiving the shares, long before selling is on your radar. That’s why smart equity planning starts early.
Prepare for Withholding Shortfalls
Equity compensation often results in under-withholding. For example:
- RSUs typically have federal tax withheld at 22%, but your actual tax rate may be higher.
- You may owe state taxes that aren’t withheld at all.
If you’re not planning ahead, this could lead to a surprise tax bill. Adjusting W-4 withholdings or making quarterly estimated payments can help.
Don’t Forget About State Taxes
If you’ve moved, or worked remotely from another state, since your equity was granted or vested, multiple states may claim taxing rights. The rules vary, and missteps can lead to double taxation or missed credits.
Working with a tax advisor can help you navigate the multi-state rules correctly and legally minimize your tax burden.
Consider Diversification and Risk
Holding too much of your company’s stock exposes you to concentration risk, especially if your income is also tied to the same employer.
Selling shares may trigger tax, but sometimes that’s the right move for your financial health. Tax planning can help you strike the right balance between minimizing taxes and reducing risk.
Track Important Deadlines
- Vesting and grant dates affect when and how you’re taxed.
- Some tax-saving strategies (like early ISO exercises) are time-sensitive.
Missing these windows can limit your options or cost you money.
Coordinate With Your Broader Financial Plan
Equity compensation doesn’t exist in a vacuum. Decisions about when to exercise, sell, or hold equity should be integrated with:
- Your cash flow
- Investment goals
- Other income
- Retirement savings
- Risk tolerance
The right tax strategy starts with understanding the whole picture.
Don’t Rely on Your Employer to Track Everything
Your employer may issue tax forms like a W-2 showing some of your income, but you are responsible for tracking your own basis, holding periods, and gain/loss breakdowns. especially when there are multiple grants or you exercise at different times. Without good records, you could overpay on your taxes or face questions from the IRS.
Plan Ahead
- Work with a CPA who understands equity comp.
- Keep detailed records of grant dates, exercise dates, purchase prices, and sales.
- Don’t wait until tax season. Many choices must be made early, like the 83(b) election or whether to sell to cover taxes on RSUs.
Equity compensation is an exciting benefit, but only if you manage it well. With the right guidance, you can turn it into a financial win rather than a tax headache.
Need Help Navigating Equity Compensation?
If you’re feeling overwhelmed by stock options, RSUs, or crypto in your portfolio, you’re not alone. I specialize in tax planning for individuals with complex compensation, especially in tech, startups, and small business ownership.
At Wise.CPA, I offer flat-fee, paperless, and fully remote tax services, built around clarity and transparency. Whether you’re planning ahead or need help sorting out past transactions, I’m here to guide you.
📩 Contact me today to schedule a free consultation or learn more about how I can help.