Equity Compensation Specialists
RSUs, ISOs, NSOs, ESPP, we help Silicon Valley tech professionals navigate equity compensation taxes with precision and strategy. From vesting to liquidation, we optimize every step. For the full 2026 mechanics across all equity-comp instruments (including post-OBBBA QSBS), see our Bay Area Tech Compensation Tax Guide 2026.
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What We Handle
Whether you're at a pre-IPO startup or a public tech giant, your equity deserves specialized attention.
RSUs vest as ordinary income at the fair market value on the vesting date. Federal law requires your employer to withhold at the supplemental wage rate: 22% on the first $1 million of annual supplemental wages and 37% above that threshold. California withholds at a flat 10.23%. For a senior engineer in the Bay Area with a $400,000 annual vest, those flat rates leave a gap of $40,000 to $60,000 in federal tax alone. That bill arrives in April.
Multi-state vest sourcing adds another layer. If you received RSU grants while working in California and later relocated to Texas, Washington, or Florida, California still claims a portion of your vest income based on the ratio of California workdays during the vesting period. This is grant-sourcing, and the Franchise Tax Board enforces it actively. Missing it means you under-report to California and may double-count income on your new state return. We model the California source fraction for every grant across multi-year vesting schedules. See our California RSU tax planning page for the full FTB rules.
The sell-at-vest versus hold decision is shaped by tax at every step. Your cost basis on vested shares is the FMV at vest, already reported as ordinary income on your W-2. If you sell immediately, you produce a near-zero capital gain or loss. If you hold, you are making a concentrated bet on one employer's stock. Any subsequent gain qualifies for long-term capital gains rates after one year from vesting, but you are also concentrating both your compensation income and your investment portfolio in a single company. FAANG and mega-cap tech companies typically run quarterly vesting on four-year grants with one-year cliffs. Annual vest totals for senior engineers routinely reach $300,000 to $800,000. At those levels, withholding gaps compound fast. We model the full-year vest schedule in Q1, calculate the quarterly estimated payments needed to close the gap, and coordinate any charitable giving or tax-loss harvesting to the quarters with the largest vest events.
Incentive Stock Options carry no regular income tax at exercise, but they create an Alternative Minimum Tax preference item. The spread between your strike price and the current fair market value, multiplied by shares exercised, is an AMT adjustment on Form 6251. The 2026 federal AMT rate is 26% up to the phaseout range and 28% above it. California imposes its own AMT at 7% with no credit recovery mechanism. Exercise too many ISOs in a single year and the AMT bill can exceed the cash you have on hand, especially if a lockup or trading-window restriction prevents you from selling shares to cover it.
Qualifying versus disqualifying disposition: to receive long-term capital gains treatment on ISO shares at sale, you must hold more than two years from the grant date and more than one year from the exercise date. A disqualifying disposition, selling before both periods are met, converts the gain from strike to FMV at exercise back into ordinary income. That wipes out most of the ISO tax advantage. The planning question is how many shares you can exercise each year while staying below your AMT crossover, and which exercise years give your qualified-disposition clock the best head start. See our AMT planning page for the full crossover calculation. For a side-by-side look at how RSU and ISO tax treatment differs across vest, exercise, and qualifying disposition, see our RSU vs. ISO mechanics guide for Bay Area tech employees.
Section 83(b) elections apply when your company allows early exercise of unvested ISOs. Early-exercised shares are still subject to forfeiture risk until they vest, so the ordinary-income clock normally does not start until vesting unless you file a Section 83(b) election within 30 days of exercise. Filing 83(b) locks in the cost basis at today's low value, starts the long-term capital gains and QSBS clocks immediately, and converts future appreciation from ordinary income to capital gain. For pre-IPO employees with small 409A valuations relative to the expected exit price, this election is frequently the highest-leverage single tax move available. The 30-day window is hard and non-extendable.
NSOs are taxed differently. When you exercise an NSO, the spread (FMV at exercise minus strike price) is ordinary W-2 income subject to payroll taxes, including Social Security up to the wage base and the 0.9% additional Medicare tax for high earners. Your employer typically executes a sell-to-cover or bills you through payroll to collect the withholding. After exercise, any further gain is a capital gain, long-term if held more than one year. NSOs can be granted to contractors, advisors, and board members, not just employees, making them common at early-stage companies. For post-IPO lockup and 10b5-1 coordination, see our post-IPO tax strategy page.
Most Section 423 ESPPs offer a 15% discount on the lower of the stock price at the start or end of the offering period, the lookback provision. A typical offering period is 6 months or 1 year. No tax is owed at the time of purchase. Tax treatment at sale depends entirely on whether you satisfy both holding periods for a qualifying disposition.
Qualifying disposition requires two separate clocks to run: more than two years from the offering (grant) date and more than one year from the purchase date. When both conditions are met, the discount is ordinary income only at the lesser of the actual discount received or the total gain at sale, and any remaining gain is long-term capital. That split saves 5 to 10 percentage points in tax on the discount portion compared to a disqualifying disposition. A disqualifying disposition is any sale before either period is met: the full discount is W-2 ordinary income on your final pay stub, and your 1099-B will show the purchase price as your basis, which creates a mismatch on Form 8949. We correct this adjustment every year so clients do not over-report capital gains.
The lookback provision can amplify the effective discount significantly in rising markets. On a one-year offering period, if the stock rose 40% from offering date to purchase date, the lookback prices your purchase at the lower offering-date price. The 15% discount then applies to an already-favorable base, pushing effective yield to 25% to 35% before tax. We track offering dates, purchase dates, and holding-period calendars across all ESPP tranches so clients know exactly when each tranche qualifies. For companies heading toward an IPO, we prepare pre-event tax plans covering how ESPP participation interacts with new-issue lockup periods and modified trading windows. See our pre-IPO tax planning page for the full picture.
A senior engineer who joined a public tech company four years ago and held their RSU vests through a strong market run can easily find 70% to 80% of their liquid net worth in a single employer's stock. That is concentration risk, and it compounds in a specific way: if the stock drops 40%, your investment portfolio falls 40% at the same moment your employer is most likely under financial stress and possibly reducing headcount. Holding employer stock is an amplifier of the exact downside scenario you most need protection from.
The tools for managing concentrated positions include: systematic diversification through a 10b5-1 plan, which lets you pre-schedule sales during open trading windows without insider-trading exposure; charitable contribution of appreciated shares directly to a donor-advised fund (DAF), which eliminates capital gains tax on the appreciation and provides a fair-market-value charitable deduction; and staged selling aligned with the tax calendar. On a $500,000 position with a $50,000 cost basis, a DAF contribution avoids $68,000 to $90,000 in capital gains tax (federal plus California) that a straight sale would trigger, while still accomplishing the same philanthropic objective. We build diversification plans that coordinate with your vesting schedule, your other income, and your giving goals.
For clients with very large positions, exchange funds and structured equity collars are also available, though these involve complexity and cost that only makes sense above certain thresholds. The starting point is always a plan: what you are trying to accomplish, over what time horizon, and what the tax cost of each path looks like before you execute anything.
Section 1202 of the Internal Revenue Code excludes up to 100% of capital gains on Qualified Small Business Stock from federal income tax, subject to a per-issuer cap of $10 million or 10 times your adjusted basis, whichever is greater. For founders, early employees, and seed investors who acquired shares when the company was still small, this exclusion can eliminate a federal tax bill of $2 million, $5 million, or more entirely. California does not conform and taxes QSBS gains at ordinary rates, but the federal savings alone are substantial enough to drive significant planning decisions.
To qualify, the stock must be: issued by a domestic C corporation with aggregate gross assets under $50 million at the time of issuance; acquired at original issuance rather than in a secondary purchase; held for more than five years; and the issuing corporation must be in a qualifying trade or business. Technology, SaaS, biotech, and most venture-backed startups qualify. Professional services firms, hospitality, and financial services generally do not. ISOs that were early-exercised with a timely Section 83(b) election can qualify if the company met the asset test at the time of exercise. RSUs at large public companies do not qualify because the company has long since exceeded the $50 million asset cap by the time shares vest.
The One Big Beautiful Budget Act of 2025 updated several QSBS parameters effective 2025. We track these changes and verify eligibility for every client with potential QSBS exposure. If you exercised early or received founder shares at a qualifying company, the threshold question is whether those specific shares were issued when the company met the asset test. We document the eligibility chain and prepare the Form 8949 reporting required at sale. For full mechanics and 2026 planning, see our QSBS tax planning page.
The period between receiving equity at an early-stage company and the eventual liquidity event is when the most consequential tax decisions get made, and when most employees are least focused on taxes. An ISO exercised early, when the 409A valuation is a small fraction of the eventual IPO price, creates an AMT event measured in thousands of dollars rather than hundreds of thousands. The same exercise done six months after IPO, when the stock is trading at 10 times the old 409A, creates an AMT event measured in the millions, often with no ability to sell restricted shares to cover it.
The pre-IPO window is also when QSBS clocks start and when Section 83(b) elections are available. The five-year holding period required for the Section 1202 exclusion begins at exercise for ISOs with a timely 83(b) election. Employees who wait until the company is public to exercise lose the ability to start that clock at a low basis and may find the company's market cap now disqualifies the stock from Section 1202 entirely. For a detailed walkthrough of the pre-IPO decision tree, AMT models at various 409A levels, and the 83(b) election mechanics, see our pre-IPO tax planning page.
After an IPO, most employees are subject to a 180-day lockup period during which they cannot sell shares. When the lockup expires, selling all available shares in a single quarter pushes a large amount of income into the highest federal and California brackets with little ability to offset it. We build post-IPO diversification schedules that spread sales across tax years, identify which tranches carry QSBS or long-term capital gains status, and coordinate with open trading windows to keep you compliant with insider-trading policies.
A 10b5-1 plan allows you to pre-schedule sales using a written plan adopted when you are not in possession of material non-public information. Sales under the plan execute automatically during open windows, removing the market-timing decision and shielding you from insider-trading claims. For clients with large post-IPO positions, we coordinate 10b5-1 plan setup with your company's equity administration team and your financial advisor. For the full post-IPO playbook including staged diversification and DAF contributions of appreciated post-IPO shares, see our post-IPO tax strategy page.
California taxes RSU vest income on the same ordinary-income rules as the federal government, but the California FTB applies grant-sourcing rules that differ in important ways from how most people expect. If you received RSU grants while a California resident and later moved out of state before all tranches vested, California claims the portion of each vest attributable to California workdays during the grant-to-vest period. California does not simply look at where you live at the time of vest: it looks back through the entire vesting period from the original grant date.
For employees who relocated to Nevada, Texas, Washington, or Florida expecting to escape California income tax on future RSU vests, this rule is the most common surprise we encounter. The calculation requires a day-count analysis for each grant going back to the original grant date. We work through this analysis for every multi-state RSU situation, prepare the California nonresident return, and calculate the California Schedule S credit for any income already taxed by the new state of residence. We also handle the most common FTB dispute scenarios including employees who worked in California briefly on projects. See our California RSU tax planning page for the detailed FTB sourcing rules.
Federal law requires employers to withhold at the supplemental wage rate: 22% on the first $1 million of supplemental wages in a year and 37% above that. The 22% flat rate is not derived from your actual marginal bracket. If you are a senior Bay Area engineer with combined household W-2 income above $200,000, your federal marginal rate is almost certainly 32% or 35%. California withholds at a flat 10.23% regardless of your actual bracket. The gap between what your employer withholds and what you actually owe requires either additional withholding via your W-4 Form, or quarterly estimated payments to the IRS and FTB calibrated to your full-year vest schedule.
Each year's exercise volume should stay at or below your AMT crossover: the ISO spread amount that keeps your Alternative Minimum Tax liability below your regular tax liability. The crossover depends on your base salary, RSU vests, filing status, and other AMT preference items. For most Bay Area engineers, the crossover falls between $50,000 and $200,000 of ISO spread per year. Exercising earlier, when the 409A valuation is low relative to expected exit value, lets you exercise more shares per year at a smaller AMT cost, and starts both the long-term capital gains clock and the QSBS five-year clock sooner. We model the crossover and build a multi-year exercise plan calibrated to your income picture.
A qualifying disposition requires holding your ESPP shares more than two years from the offering date and more than one year from the purchase date. When both conditions are met, only the discount (or the total gain if smaller) is ordinary income and the rest is long-term capital gain. A disqualifying disposition is any sale before either condition is satisfied: the full discount is W-2 ordinary income on your pay stub, and your 1099-B will show a lower basis than your actual adjusted basis, which means you will over-report capital gains unless you adjust it on Form 8949. The qualifying disposition typically saves 5 to 10 percentage points in tax on the discount portion.
When you exercise an NSO, the spread is taxed as ordinary W-2 income immediately, regardless of what you do with the shares afterward. The hold-or-sell decision after exercise is a question of expected after-tax return from holding a concentrated employer-stock position versus selling at exercise and reinvesting the net proceeds in a diversified portfolio. Holding only makes sense if you have a specific, reasoned view on the stock's future appreciation that justifies the concentration. For most clients without that conviction, selling at exercise to diversify is the cleaner default. Any future appreciation above the exercise-day FMV is capital gain, long-term after one year.
Section 1202 QSBS exclusion applies to stock originally issued by a domestic C corporation with aggregate gross assets under $50 million at the time of issuance, held for more than five years. ISOs that were early-exercised with a timely Section 83(b) election, while the company still met the asset test, can qualify. RSUs at large public companies generally do not qualify because the company has already exceeded the $50 million asset threshold by the time shares vest. If you have early-exercised ISOs at a startup that later goes public or is acquired, we analyze QSBS eligibility and prepare the Form 8949 exclusion claim at sale. Federal exclusion on $10 million of gain eliminates a $2 million federal tax bill entirely.
California's FTB claims the portion of your future vest income sourced to the period you worked in California, using a workday ratio: California workdays during the grant-to-vest period divided by total workdays during that period. Even after you relocate to Nevada, Texas, or Florida, California can tax its sourced fraction of each vest. You file a California nonresident return and pay tax on the California-sourced portion. Your new state may or may not tax the same income; the California Schedule S credit prevents double taxation where applicable. The day-count analysis goes back to the original grant date for each separate tranche, which requires records most employees do not keep without help.
Al Nuñez anchors the equity compensation practice at Silicon Valley Tax. He brings more than 20 years of equity-comp tax experience, including years at Andersen and RSM advising technology clients on RSU, ISO, NSO, and ESPP planning at every stage from early-stage startup to post-IPO public company. Al holds a JD from UNLV William S. Boyd School of Law and is a licensed CPA. He works directly with clients on ISO exercise modeling, AMT crossover analysis, QSBS eligibility, post-IPO diversification strategy, and complex multi-state situations involving California grant-sourcing rules. If your equity situation involves more than a straightforward W-2 vest, Al is who you want across the table. Silicon Valley Tax is a tax and accounting firm with CPAs on staff serving Bay Area tech employees and their families. Schedule a complimentary consultation to speak with Al directly about your equity situation.
Schedule a complimentary consultation and we'll review your equity situation, identify planning opportunities, and outline a tax strategy before the next vest event.