Capital Gains Tax on RSUs and Stock Options: What Tech Professionals Need to Know

By Trevor Scotto, CPA, CFP®

This article is for educational purposes only and does not constitute individualized tax, legal, or investment advice. Tax laws are subject to change. The impact of any strategy depends on your specific income, filing status, employer plan, state of residence, and broader financial situation. Consult your own tax and legal advisors before acting on anything described here.

Tech professionals across Silicon Valley and beyond receive a growing share of their total pay in the form of equity: restricted stock units (RSUs), incentive stock options (ISOs), and non-qualified stock options (NSOs). Each of these triggers a tax event at some point, and the rate you pay depends heavily on the type of award, how long you hold the shares, and your total income for the year.

Federal tax law draws a clear line between short-term and long-term capital gains. Short-term gains, on assets held one year or less, are taxed at ordinary income rates, which can reach 37% for high earners. Long-term capital gains tax rates are lower: 0%, 15%, or 20% depending on your taxable income and filing status, making the holding period a critical planning variable.

Tax treatment should not, however, be the only input to your decision. Receiving a lower tax rate on future appreciation does not necessarily make holding employer stock the better financial decision. The potential tax benefit must be weighed against concentration risk, liquidity needs, and the possibility that the stock declines during the required holding period. Tax planning is one input to the broader financial decision, not the objective itself.

For most publicly traded company RSUs, the fair market value of the shares when they vest and settle is reported as ordinary compensation income, generally on Form W-2. (IRS Publication 525, Taxable and Nontaxable Income, Employee Compensation / Restricted Property section, as of 2026-07-23.) That amount becomes your tax basis in the shares, and the capital gains holding period generally begins at settlement.

If you sell the shares immediately after settlement, there is usually little or no capital gain or loss. Any subsequent change in value is treated as a capital gain or loss when the shares are sold. If you hold those shares for more than one year after settlement and the stock has risen, the gain above your basis may qualify for long-term capital gains treatment.

A common point of confusion: the grant date does not start the holding period. The clock begins at settlement, not when the RSU was originally awarded.

When you exercise an NSO, the spread, the difference between the stock's fair market value on the exercise date and your exercise price, is ordinary compensation income, generally reported on Form W-2 or Form 1099-NEC. Your tax basis in the shares equals the fair market value at exercise (exercise price plus the spread recognized as income).

After exercise, the shares need to be held more than one year for any further appreciation to be taxed at long-term capital gains rates. The holding period for NSO shares begins on the exercise date, not the grant date.

Deciding when to exercise NSOs and whether to hold or sell the resulting shares involves tax, investment, and liquidity considerations that interact with the rest of your financial picture. Our equity compensation planning service is designed specifically for professionals managing these decisions.

ISOs carry more favorable potential tax treatment than NSOs, but the rules are stricter. To achieve a qualifying disposition for ISO shares, you must meet both of the following conditions:

• Hold the shares for more than two years from the original grant date, and
• Hold the shares for more than one year from the date of exercise.

If both conditions are met, the entire gain from exercise price to sale price may be treated as long-term capital gain rather than ordinary income, which is a potentially significant tax difference for high earners.

If either condition is not met, a disqualifying disposition, part or all of the gain reverts to ordinary income treatment. The portion treated as ordinary income is generally the lesser of (1) the gain on sale or (2) the spread at exercise (the fair market value at exercise minus the exercise price).

There is a meaningful trade-off: exercising ISOs and holding the shares exposes you to Alternative Minimum Tax (AMT), a separate parallel tax system. That AMT consideration is one reason ISO strategy requires careful, forward-looking planning well before you exercise.

When you exercise an ISO, the spread, the fair market value at exercise minus the exercise price, is not taxable for regular income tax purposes at that time. It is, however, an AMT preference item under the alternative minimum tax system. (2025 Instructions for Form 6251, Alternative Minimum Tax -- Individuals, as of 2026-07-23.) This means exercising ISOs can create an AMT liability even if you do not sell any shares in the same year.

ISO shares also carry a different cost basis depending on which tax system you are calculating under. For regular tax purposes, your basis is the exercise price. For AMT purposes, your basis is increased by the AMT adjustment recognized at exercise, meaning your basis equals the fair market value at the time of exercise. When you later sell the shares, the gain or loss amounts will differ between the two systems, and these differences must be tracked carefully on your return.

When prior-year AMT credits are available, they do not automatically offset newly generated AMT in the same year. Prior-year minimum tax credits (calculated on Form 8801, Credit for Prior Year Minimum Tax -- Individuals, Estates, and Trusts) may become usable in years when your regular tax exceeds your tentative minimum tax. AMT planning for ISOs typically involves projecting regular tax, tentative minimum tax, the potential AMT adjustment from the exercise, and whether prior-year minimum tax credits may become usable in the current or future years. (IRS Publication 525, Statutory Stock Options / AMT basis, as of 2026-07-23.)

The federal long-term capital gains tax rate that applies to a given dollar of gain depends on your total taxable income, filing status, and the composition of your other income for the year. Below are the thresholds for the 2026 tax year (the current planning year as of this article). Note that these are federal rates only. State income taxes apply separately and vary significantly. California, for example, does not have a lower rate for long-term capital gains.

Tax Year 2026 (current in-force tax year):
Source: IRS Revenue Procedure 2025-32 and IRS newsroom summary (published Oct. 9, 2025; as of 2026-07-23)

Rate	Single	Married Filing Jointly	Head of Household
0%	Up to $49,450	Up to $98,900	Up to $66,200
15%	$49,451–$545,500	$98,901–$613,700	$66,201–$579,600
20%	Over $545,500	Over $613,700	Over $579,600

These rates operate as brackets. Long-term capital gains are generally stacked on top of your other taxable income, so portions of the same gain may be taxed at 0%, 15%, and 20%. Crossing a threshold does not cause the entire gain to be taxed at the higher rate. Your taxable income, filing status, and other income all determine how much of a given gain falls into each bracket.

For reference, Tax Year 2025 (returns filed in spring 2026) thresholds: 0% up to $48,350 single / $96,700 MFJ / $64,750 HoH; 15% up to $533,400 single / $600,050 MFJ / $566,700 HoH; 20% above those amounts. (IRS Topic No. 409, Capital Gains and Losses, as of 2026-07-23.)

In addition to these rates, higher-income taxpayers may also be subject to a 3.8% Net Investment Income Tax (NIIT) on net investment income, depending on their modified adjusted gross income. This is an additional layer on top of the capital gains rates shown above, not a replacement, and whether it applies depends on individual circumstances.

The difference between short-term and long-term treatment on a sizable RSU vest or option exercise is not trivial. Consider two common scenarios for an RSU holder:

• Sell at settlement: Shares are sold immediately after vesting and settlement. Your tax basis equals the fair market value recognized as ordinary income at settlement, so there is usually little or no capital gain. This is the simplest approach and avoids concentration risk, but it does not generate any long-term capital gains treatment because the holding period has barely begun.
• Hold after settlement: You keep the shares after vesting and sell more than one year later. The fair market value at settlement is still ordinary income and forms your basis. Any appreciation above that settlement price, if the stock has risen, may qualify for long-term capital gains treatment when you sell. The trade-off: you remain exposed to company stock risk during the entire holding period, and the stock may decline.

For ISO holders, the timing trade-off is more complex. Exercising early, well before a planned sale, may help you satisfy both the two-year-from-grant and one-year-from-exercise tests for a qualifying disposition. However, exercising ISOs means recognizing the spread as an AMT preference item in the year of exercise, which could trigger AMT even if no shares are sold. The actual tax impact depends on your total income, other deductions, and available AMT credits from prior years.

These scenarios illustrate the considerations and trade-offs involved, not guaranteed outcomes. The most tax-efficient choice for one person may be the wrong choice for another depending on stock price, income levels, anticipated future income, risk tolerance, and liquidity needs.

Employers often use the optional 22% flat federal withholding rate on supplemental wages, including many RSU vesting events. (IRS Publication 15, Circular E, Employer's Tax Guide, Section 7 -- Supplemental Wages, as of 2026-07-23.) That withholding may be well below the employee's actual marginal tax rate. Different withholding methods can apply, and supplemental wages above $1 million are generally subject to a 37% federal withholding rate.

Withholding is a prepayment toward your annual tax liability, not necessarily the final amount owed. For high earners in top federal and state brackets, the gap between 22% withholding and a combined effective rate that may be considerably higher can result in a significant balance due at tax time, especially if multiple RSU tranche vestings occur throughout the year.

Monitoring your estimated tax payments and adjusting withholding (or making quarterly estimated payments) across multiple vest events during the year can help avoid an unexpected April tax bill.

Donating publicly traded shares held for more than one year to a donor-advised fund or qualified public charity may allow you to avoid recognizing the embedded capital gain and claim a deduction based on fair market value, subject to applicable deduction limits. Shares held one year or less generally do not receive the same deduction treatment. (IRS Publication 526, Charitable Contributions, Capital Gain Property / Limits on Deductions; IRS Publication 561, Determining the Value of Donated Property; as of 2026-07-23.)

The deduction is subject to AGI percentage limits. Long-term capital gain property donated to a public charity or donor-advised fund is generally limited to 30% of adjusted gross income, with a five-year carryforward for any excess. Cash gifts to the same types of organizations are generally limited to 60% of AGI. These limits interact with your other deductions and income, so the actual tax benefit depends on your specific situation.

For RSUs specifically, shares must have vested and been held for more than one year before donation to receive this treatment. Donating unvested RSUs or recently vested shares held one year or less will not produce the same outcome. Gifting shares to family members may also be appropriate in some situations depending on estate planning goals and the recipient's tax circumstances, though this involves separate gift tax considerations.

No. California does not have a preferential long-term capital gains rate. All capital gains, whether short-term or long-term, are taxed as ordinary income under California law. (California Franchise Tax Board, Capital gains and losses, as of 2026-07-23: "California does not have a lower rate for capital gains. All capital gains are taxed as ordinary income.")

California's top marginal income tax rate is 13.3% on taxable income above $1 million (single or married filing jointly). For high-earning tech professionals, the combined federal and California tax rate on long-term capital gains can exceed 30% or more, depending on filing status and total income. This is a key reason why California-based equity holders need to model both federal and state taxes when evaluating holding-period decisions.

Equity compensation planning is not a one-time calculation. It is an ongoing, year-by-year coordination challenge that spans tax projections, investment decisions, and sometimes charitable or estate planning. Several moving pieces typically require coordination:

• RSU withholding gaps. The 22% supplemental withholding rate is often below an executive's actual marginal rate. Tracking this gap across multiple vest events throughout the year and making estimated payments as needed is essential to avoiding a large balance due.
• AMT planning for ISOs. Because ISO exercises can trigger AMT in the year of exercise without any cash proceeds, forward-looking modeling of AMT exposure before you exercise is essential. This typically involves projecting regular tax, tentative minimum tax, the potential AMT adjustment from the exercise, and whether prior-year minimum tax credits may become usable in the current or future years.
• Charitable and gifting strategies. Donating publicly traded shares held more than one year to a donor-advised fund or qualified public charity may allow you to avoid recognizing the embedded capital gain and claim a deduction at fair market value, subject to applicable AGI limits and other rules. The deductibility and amount depend on your specific tax situation.
• Coordinating with year-end tax preparation. Equity events, including vesting, exercises, and sales, generate specific tax forms such as W-2 reporting, Form 3921 for ISOs, and Form 1099-B for sales. The advisor and CPA need to work from the same information set. Errors or miscommunications between separate providers are a common source of reporting mistakes.

At FFG Wealth, our fee-only, fiduciary model means CPA advisors and wealth managers work together under one roof. The same team that models your AMT exposure is the team managing your portfolio and reviewing your withholding. This integrated structure is designed to reduce the coordination friction that equity holders often experience when their tax preparer and financial advisor operate in separate silos. No commissions, no product sales, just advice aligned with your interests.

If you hold RSUs, ISOs, NSOs, or ESPP shares and want to think through the tax and investment planning around your equity compensation, we invite you to explore our equity compensation planning service or learn more about our tax planning and mitigation services.

Are RSUs taxed twice?

Generally, no. RSUs are taxed once as ordinary income (on Form W-2) when the shares vest and settle. If you later sell the shares, you may owe capital gains tax on any appreciation above your tax basis since settlement, but that is a separate event, not a second tax on the same income. The key is understanding that the fair market value at settlement establishes both your ordinary income and your basis, so a sale at exactly that price produces no additional gain or loss.

Should I sell RSUs immediately when they vest?

There is no universally correct answer. Selling immediately is simple, avoids concentration risk, and typically results in little or no capital gain beyond the ordinary income already recognized at settlement. Holding shares for more than one year after settlement may allow future appreciation to qualify for lower long-term capital gains rates, but it requires you to accept continued exposure to single-stock risk throughout the holding period. The right choice depends on your overall financial situation, the size of the position relative to your net worth, your income, and your risk tolerance.

When does the holding period begin for RSUs?

For RSUs in most publicly traded companies, the capital gains holding period generally begins on the date the shares vest and settle, not on the grant date. Shares sold within one year of settlement are generally subject to short-term capital gains rates. Shares sold more than one year after settlement may qualify for long-term capital gains rates on any appreciation above the settlement-date fair market value.

What is a qualifying disposition of an incentive stock option?

A qualifying disposition of ISO shares generally requires holding the shares for more than two years from the original grant date and more than one year from the exercise date, and both conditions must be met. When these conditions are satisfied, the gain from exercise price to sale price is generally treated as long-term capital gain rather than ordinary income. If either condition is not met, the disposition is disqualifying and part or all of the gain is treated as ordinary income in the year of sale.

How does the alternative minimum tax apply to ISOs?

When you exercise an ISO, the spread between the exercise price and the fair market value at exercise is an AMT preference item. This means exercising a large ISO grant can create a significant AMT liability in the year of exercise even if you do not sell any shares. ISO shares also carry a different basis for AMT purposes than for regular tax purposes. Planning around ISO exercises typically involves projecting both regular tax and tentative minimum tax, as well as understanding how prior-year minimum tax credits (Form 8801) may become available in future years when regular tax exceeds tentative minimum tax.

Does California have a lower tax rate for long-term capital gains?

No. California does not have a preferential long-term capital gains rate. All capital gains are taxed as ordinary income under California law, at rates up to 13.3% for high earners. (California Franchise Tax Board, Capital gains and losses, as of 2026-07-23.) This is an important difference from the federal tax system and meaningfully affects the after-tax outcome of holding-period decisions for California residents.

Can I donate vested RSUs or company stock to charity?

Once RSUs have vested and settled, you own the shares and can generally donate them to a qualified public charity or donor-advised fund. Publicly traded shares held for more than one year may allow you to avoid recognizing embedded capital gains and claim a fair market value deduction, subject to AGI limits (generally 30% of AGI for long-term capital gain property to a public charity or DAF, with a five-year carryforward). Shares held one year or less generally do not receive the same deduction treatment. Consult a tax advisor about your specific situation before donating.

Why might RSU withholding be lower than the tax I actually owe?

Employers commonly apply the IRS optional 22% flat withholding rate to supplemental wages, which includes most RSU vesting events. If your marginal federal tax rate is higher than 22%, which is common for tech professionals in higher income brackets, the withholding will not cover your full tax liability. Add state income tax on top (California taxes RSU income as ordinary income), and the gap between withholding and actual liability can be substantial. Withholding is a prepayment, not the final determination of what you owe. Tracking your vesting schedule and making estimated payments throughout the year can help avoid a large balance due at filing.