Equity Tax Planning: Strategies for Navigating Taxes and Equity Compensation
Equity can be one of the most valuable parts of your compensation package, but it can also be layered with complex tax rules and time-sensitive decisions. Without proactive equity tax planning, you can end up with significant tax bills that catch you off guard.
Here, we’ll explain how equity is taxed and offer practical strategies for making informed decisions about when, why, and how to act. With these tools in hand, you can avoid surprises from the IRS and turn your equity compensation into long-term wealth.
How Does Equity Get Taxed?
While it would certainly make things easier if the IRS taxed all types of equity compensation the same, tax treatment depends on different factors:
The type of equity you receive
When the shares vest or are exercised
The fair market value of the shares at that time
How long you hold the shares before selling
Your income level and tax bracket
Whether the alternative minimum tax (AMT) applies
Where you live and work when the income is earned and realized
Equity taxation depends on the type of award. Full-value awards (RSUs, RSAs, PSUs, and time-based stock awards) are taxed at vesting, while stock options are taxed when exercised. All equity is taxed again when sold.
Vesting
When full-value equity awards vest, they’re no longer a promise and become, in the eyes of the IRS, your income. They’ll be valued at their market price on the vesting date and taxed just like your salary.
This income can push you into higher marginal tax brackets and trigger additional taxes, such as Medicare surtaxes or the phaseout of certain deductions and credits. Employers typically withhold shares to cover some taxes, but for high earners this is often insufficient. Planning ahead with your financial planner can help avoid a surprisingly large tax bill.
Exercising Options
When you exercise stock options, the IRS treats the value you receive as taxable income.
Unlike full-value equity awards, however, you’re only taxed on the spread between your exercise price and the stock’s fair market value. For example, if you can buy shares at $10 and exercise when they’re worth $40, the $30 difference is treated as ordinary income (or AMT for ISOs).
Stock options often create tax obligations before liquidity. While NQSOs usually include tax withholding, it’s often insufficient for high earners, and ISOs generally have no withholding. Without careful tax planning and equity compensation planning, a large tax bill can arrive well before you’re able to sell shares.
Selling Shares
Selling your shares is the final step in how equity compensation is taxed, and it’s where capital gains come into play. When you sell, the IRS looks at how much the stock changed in value between the time it became taxable (at vesting for full-value awards or at exercise for stock options) and the price you sold it for.
That difference is taxed as a gain or a loss, with longer holding periods typically qualifying for lower long-term capital gains rates. For high earners, gains may also be subject to a 3.8% net investment income tax.
Common Types of Equity Compensation
Each type of company equity is structured differently, which is why the tax treatment and planning opportunities can vary so widely. Let’s break down how the most common types work, and what those differences mean for your taxes.
Stock Options (NQSOs and ISOs)
Stock options give you the right to buy shares at a fixed, and usually discounted, price. Whether they’re non-qualified stock options (NQSOs) or incentive stock options (ISOs), you’ll be taxed at exercise. However, the way the tax is calculated depends on the type:
NQSOs: The difference between your strike price and the stock’s fair market value is taxed as ordinary income when you exercise. Employers usually withhold a portion to cover your tax bill, but high earners often owe more at filing time.
ISOs: The spread isn’t taxed under the normal federal income tax system at exercise, but it is counted for Alternative Minimum Tax (AMT), a separate calculation designed to ensure high earners pay a minimum level of tax.
Restricted Stock Units (RSUs) and Restricted Stock Awards (RSAs)
RSUs and RSAs deliver actual shares rather than the right to buy them. The key difference between the two is when you become the legal owner of the stock:
RSUs (Restricted Stock Units) are a promise to deliver shares in the future; you receive and are taxed on the stock when it vests.
RSAs (Restricted Stock Awards) are actual shares issued at grant but subject to vesting and forfeiture. You legally own the stock from day one, even though it is restricted and typically cannot be sold until vesting.
RSUs are taxed at vesting, while RSAs may be taxed at grant or vesting depending on whether an 83(b) election is filed. Employers often withhold shares to cover some taxes, but flat withholding rates can leave high earners owing more at filing time.
Employee Stock Purchase Plans (ESPPs)
ESPPs allow employees to buy company stock through payroll deductions, often at a discount to market price. Taxes are triggered when you sell, making the timing of the sale especially important.
If you meet the IRS holding requirements (a qualifying disposition), only a portion of the discount is taxed as ordinary income, with any additional gain taxed at long-term capital gains rates.
If you sell before meeting those requirements (a disqualifying disposition), the discount is taxed as ordinary income based on the stock’s value at purchase, which often results in a higher overall tax bill. While this may make sense in certain situations, it’s usually less tax-efficient.
Performance Equity
Performance-based equity, such as performance stock units (PSUs), vests when specific milestones are met, such as revenue targets or stock price thresholds. At vesting, the shares are treated like other full-value awards and taxed as ordinary income based on their fair market value.
In private companies, this can create a tax obligation even if the shares are not yet liquid. After vesting, any future change in value is taxed as capital gains when the shares are eventually sold.
Founder and Early-Stage Stock
Founder stock and early employee equity are usually issued as restricted stock or early stock options, often at very low valuations.
With tax-optimized planning for founder equity, including timely 83(b) elections and careful QSBS tracking, these shares can qualify for some of the most favorable tax treatment in the tax code. Without that planning, founders and early hires risk losing eligibility for key benefits or facing less favorable tax treatment over time.
5 Equity Compensation Tax Strategies
Proactive equity tax planning helps you manage when and how your compensation is taxed, reducing risk and helping you keep more of what you earn. Here are the top five strategies we recommend to clients with company stock:
1. Coordinate Equity Timelines and Exercise Decisions
Equity compensation runs on multiple timelines at once. Vesting schedules, exercise windows, expiration dates, and post-termination rules all determine when income is triggered and when decisions must be made.
Option exercise timing is especially important. Because taxes depend on your income level and the stock’s value at exercise, choosing when to exercise can materially change the outcome. Exercising earlier may reduce taxes if the stock later appreciates, but it also increases risk by locking up your money sooner. Waiting often reduces risk, but can lead to higher taxes if the stock’s value rises.
Treating equity timelines as part of your broader financial calendar helps you make proactive decisions rather than reacting to deadlines.
2. Optimize Holding Periods, Liquidity, and Tax Treatment
Once equity becomes taxable, how long you hold your shares matters. Shares held for more than a year may qualify for long-term capital gains rates, while selling too soon can push the proceeds into higher-taxed short-term gains.
For founders and early employees, longer holding periods may unlock additional benefits. Certain shares may qualify as Qualified Small Business Stock (QSBS), potentially allowing a portion of gains to be excluded from federal taxes if specific requirements are met.
In many cases, selling the stock outright is the simplest and most flexible way to diversify. While this approach often results in the highest immediate tax bill, it comes with the fewest constraints and reduces concentration risk right away.
For employees subject to trading restrictions or insider considerations, a 10b5-1 trading plan can provide structure and compliance. These plans allow you to pre-schedule sales by amount, price, and timing, helping you execute a disciplined strategy while staying within company and regulatory rules.
3. Use Charitable Giving Strategically
Donating appreciated shares is one of the most tax-efficient ways to support causes you care about. Rather than selling stock and paying capital gains tax, you can donate shares directly and receive a charitable deduction for their fair market value.
Coordinating charitable giving with equity events, such as vesting, option exercises, or liquidity moments, can reduce your overall tax burden while allowing your equity compensation to create lasting impact.
4. Diversify Concentrated Stock Positions
When a significant portion of your net worth is tied to your company stock, both your income and investments depend on the same employer. Diversifying a concentrated position often involves selling and realizing capital gains, but there may be strategies that can reduce or defer taxes in the right situations.
In some cases, exchange funds may offer a path to diversification by allowing concentrated stock to be contributed to a pooled portfolio in exchange for fund shares, while deferring capital gains taxes. However, these strategies come with meaningful limitations, including long holding periods, eligibility requirements, and reduced flexibility, and should be evaluated carefully.
5. Gift Stock to Family Members Strategically
If you’re already gifting assets to family members, gifting appreciated stock instead of cash can be an effective way to reduce concentration risk. The recipient may be in a lower tax bracket, allowing shares to be sold at a lower capital gains rate, while you gradually reduce your exposure.
This strategy has tradeoffs. Annual gifting limits apply before you begin using your lifetime exemption, which can make this a slow process for large positions. Because diversification may take years, you remain exposed to market volatility along the way. Gifting stock works best when coordinated with tax, estate, and investment planning.
Plan Your Tax Strategy with Citrine Capital
The difference between confident decision-making and costly surprises comes down to proactive planning. At Citrine Capital, our experienced wealth managers and tax team work closely with clients who have complex compensation structures to build thoughtful, forward-looking equity tax strategies. To get started, schedule a conversation now.
About The Author
Jirayr Kembikian, CFP® is a wealth advisor, managing director and co-founder of Citrine Capital, a San Francisco-based wealth management and tax preparation firm serving tech professionals, founders, and business owners. He specializes in navigating the complexities of equity compensation, private investments, and Bitcoin wealth strategies. With over a decade of experience guiding clients through liquidity events and complex financial decisions, Jirayr brings a grounded yet forward-thinking perspective to building and preserving wealth.