Your tech company grants you stock, you watch it vest, the price goes up, and somewhere between the joy of a rising ticker and the panic of a vesting email you owe the IRS more than you planned. Equity compensation is the single most expensive money mistake I see smart, otherwise careful people make in their working lives. Most of the damage comes from not understanding the three flavors you’ve actually been granted and the few small tax moves that protect real money.
Know which flavor of equity you actually have
These three instruments look similar on a brokerage statement and behave nothing alike.
- RSUs (Restricted Stock Units) are the simplest. On the vesting date, a chunk of company stock is deposited into your account and treated as ordinary income at that day’s price. There’s no strike to worry about. The check you have is built in.
- Stock options (ISOs and NSOs) give you the right to buy shares at a fixed strike price. You only make money if the market price is above the strike when you exercise. ISOs get favorable long-term capital gains treatment if you play by the rules. NSOs are taxed as ordinary income on the spread at exercise.
- ESPP (Employee Stock Purchase Plan) lets you buy shares at a discount, usually 15%, using accumulated payroll deductions over a six-month offering period. The discount is yours free and clear; the question is what you do with the shares afterward.
Before you do anything else, open your equity grant agreement and confirm which one you have. The advice below does not transfer between them.
RSUs: pick a plan the day the first batch vests
Many tech employers let you elect to sell a portion of each RSU vest as it happens, withholding taxes automatically. That is the right default for most people for three reasons:
- It diversifies you out of a single ticker that already represents your salary, your bonus, and your career.
- It avoids the worst tax trap in the category: a fat vest in a high-income year with no cash to cover the withholding.
- It removes the temptation to “let it ride one more quarter” right before a layoff, an earnings whiff, or a routine 20% drawdown.
If your employer doesn’t auto-sell, set a calendar reminder the day before each vest and decide in advance what percentage you’ll sell. Ten to fifty percent is a sensible range depending on how concentrated you are with this employer and how much of your net worth depends on the next four quarterly prints.
Stock options: do the math before you exercise
Three numbers matter: the strike price, the current fair market value, and the exercise cost. For NSOs, the difference between FMV and strike is taxed as ordinary income the moment you exercise. For ISOs, you can defer that ordinary-income hit by holding past the one-year-and-one-year mark, but you usually need cash to exercise and you may trigger AMT (Alternative Minimum Tax). For most employees below the C-suite, AMT is the bigger surprise and the bigger bill. Run the AMT calculation before you exercise ISOs, not after.
Quick example. You have 1,000 ISOs at a $20 strike. The stock is trading at $60. You exercise all of them and immediately sell (cashless exercise). You pay ordinary income tax on the $40 spread minus the strike, all in the same tax year. You owe tax on $40,000 today. If instead you exercise and hold for the long-term capital gains window, the $40 spread is still a preference item for AMT in the year of exercise, even though it isn’t regular taxable income. For many employees, that AMT adjustment is the difference between owing the IRS $4,000 and owing them $11,000 the following April.
Cashless exercise exists and is the right path when you don’t want to write a check. The exercise and the sale happen in the same transaction; you get the net spread in cash and the company handles the withholding. The trade-off is you lose the long-term capital gains treatment because you never actually hold the shares.
The ESPP looks free. It usually isn’t.
A 15% discount on your employer’s stock, with the discount taxed at ordinary rates on the gain (the difference between the discount price and the sale price) and the post-purchase appreciation taxed at long-term capital gains if you hold, is a real benefit. Most people sabotage it in one of two ways:
- They sell immediately at the end of the offering period and capture the discount. That’s fine. That’s the conservative play.
- They hold, hoping for more upside, and end up with concentrated employer exposure that took a haircut in the next down cycle. That is a real cost you don’t see on the statement.
If your plan has a “lookback” feature (the purchase price is set by the lower of the start or end price of the offering period), the math is more attractive and a slightly larger hold becomes defensible. Without lookback, sell at the end of the offering period and move on.
The tax moves that actually save real money
None of these are exotic. All are easy to skip.
- Adjust your W-4 after a big vest. A $50,000 vest in March raises your projected income. Adding extra withholding or estimated tax payments the rest of the year avoids the underpayment penalty and the April surprise.
- Track cost basis carefully. Your RSU vest statement tells you the ordinary-income basis. Your ESPP statement shows the discount as ordinary income. Your exercised ISOs have a strike-price basis plus AMT adjustments. Mix them up and you overpay capital gains tax on shares you never actually earned a capital gain on.
- Mind the wash sale rule. Selling RSUs at a loss and buying more in your own brokerage within 30 days disallows the loss entirely.
- Don’t forget state tax. If you vest while working in California and quit two weeks later for a job in Florida, your state of residence on the vest date usually decides what you owe. This is one of the few cases where timing a relocation by a few weeks is worth talking to a tax professional about.
The simplest plan that works for most people
Sell enough RSUs at vest to bring your total annual income to your target number. Sell all ESPP shares at the end of the offering period. Hold options only if you have a thesis on the company beyond your salary. Diversify the cash into a total market index fund the day it hits your account, not when the market “feels better.” That boring sequence beats the brilliant-seeming market timing most employees convince themselves they will execute.
