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

By Trevor Scotto, CPA, CFP®

Last updated: September 2026

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.

Short-term capital gains generally apply when an asset is held one year or less and are taxed at ordinary income-tax rates. Long-term capital gains generally apply after more than one year and may be taxed at 0%, 15%, or 20% federally, depending on taxable income and filing status. (IRS Publication 550, Investment Income and Expenses; IRS Revenue Procedure 2025-32, as of September 9, 2026.)

For tech professionals, the key question is not simply whether a long-term rate is lower. RSUs, ISOs, and NSOs each establish basis and begin a holding period at different times. The resulting decision may also involve cash-flow needs, tax withholding or estimated payments, trading restrictions, and the risk of keeping too much wealth in a single company.

A lower tax rate on future appreciation does not by itself make holding employer stock appropriate. Any potential tax benefit should be considered next to concentration risk, liquidity needs, and the possibility of a price decline while waiting for a holding period to run. Tax treatment is one input to a broader financial decision, not the objective itself.

The tax timing for equity compensation depends on the award. RSUs create ordinary income at vesting and settlement, NSOs create ordinary income at exercise, and ISOs may create an AMT adjustment at exercise. For RSUs and NSOs, later appreciation may qualify for long-term treatment only after more than one year from settlement or exercise, respectively.

Award	Compensation tax event	When the capital-gains clock generally starts	Key trade-off
RSUs	Fair market value at vesting and settlement, generally on Form W-2	Settlement date	Holding can expose you to additional employer-stock concentration after income has already been recognized.
NSOs	Exercise spread, generally on Form W-2 or Form 1099-NEC	Exercise date	Holding for a potential long-term rate requires accepting market risk after paying ordinary income tax on the spread.
ISOs	Potential AMT adjustment at exercise; sale determines regular-tax treatment	Exercise date, with an additional two-year-from-grant test	A qualifying disposition has strict timing rules and holding shares can create both AMT and concentration exposure.

This table is a general framework, not individualized tax advice. Award agreements, sale timing, state rules, and an individual tax return can change the analysis. For a fuller explanation of the award types, see our equity compensation planning page.

RSUs are taxed as ordinary income based on the fair market value of the shares at vesting and settlement, generally reported on Form W-2. That settlement-date value becomes your cost basis, and the capital gains holding period begins on that date, not on the original grant date.

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.

Exercising an NSO creates ordinary income equal to the spread between the exercise price and the fair market value at exercise, generally reported on Form W-2 or Form 1099-NEC. The holding period for long-term capital gains treatment on later appreciation begins at exercise, not at grant.

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.

A qualifying disposition of ISO shares requires holding the shares more than two years from the grant date and more than one year from the exercise date. When both tests are met, the entire gain may be taxed as a long-term capital gain rather than ordinary income.

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.

Exercising an ISO can trigger the alternative minimum tax because the spread between the exercise price and the fair market value counts as an AMT preference item, even though it is not taxed under the regular system that year. This can create a real tax bill before any shares are sold.

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.)

AMT exemptions and phaseout thresholds are adjusted periodically, so they should be verified for the applicable tax year before an exercise. A large ISO exercise can increase alternative minimum taxable income and may create tax due even when no shares are sold. The IRS Instructions for Form 6251 provide the current calculation framework (as of September 9, 2026).

For 2026, federal long-term capital gains are taxed at 0%, 15%, or 20% depending on taxable income and filing status, with thresholds adjusted annually for inflation (IRS Revenue Procedure 2025-32). These are federal brackets only. State taxes, including California's, apply separately.

The federal long-term capital gains tax rate that applies to a given dollar of gain depends on total taxable income, filing status, and other income for the year. The thresholds below apply to tax year 2026 and are federal 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, Section 4.03, and the IRS 2026 tax-inflation-adjustment announcement (as of September 9, 2026).

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.

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.

Because these brackets apply to taxable income, the 2026 standard deduction is also relevant: $16,100 for single filers and married filing separately, $32,200 for married filing jointly, and $24,150 for head of household (IRS Revenue Procedure 2025-32). The standard deduction (or itemized deductions, if greater) reduces gross income before these capital gains thresholds are applied.

Selling shares immediately at vesting or exercise typically produces little capital gain because the basis equals the value already taxed as income. Holding longer may allow future appreciation to qualify for long-term rates, but it also extends exposure to single-stock risk during the holding period.

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.

"The biggest mistake we see with equity compensation is making tax decisions in isolation. The tax treatment matters, but it is one input alongside concentration risk, liquidity needs, and your broader financial plan."

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 commonly withhold RSU vesting income at a flat 22% federal rate for supplemental wages, rising to 37% on amounts above $1 million in a calendar year (IRS Publication 15, 2026). That withholding is a prepayment, not the final tax owed, and it may fall short of an employee's actual marginal rate.

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.

Reviewing projected tax after each vesting event can identify whether payroll withholding appears sufficient. If additional tax may be due, increasing wage withholding or making quarterly estimated payments are two common ways to address the gap, subject to the IRS payment and safe-harbor rules. See IRS Form 1040-ES and IRS guidance on estimated-tax underpayment (as of September 9, 2026).

Donating publicly traded shares held more than one year to a donor-advised fund or public charity may avoid recognizing the embedded capital gain and support a deduction at fair market value, subject to AGI limits (IRS Publication 526). Shares held one year or less generally do not qualify for this treatment.

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.

California taxes all capital gains, short-term and long-term, as ordinary income with no preferential rate, up to a top marginal rate of 13.3% (California Franchise Tax Board). Combined federal and California tax on long-term gains can meaningfully exceed the federal rate alone.

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 involves withholding gaps, AMT exposure, charitable planning, and year-end tax reporting that interact with one another. Coordinating these decisions between a CPA and a financial advisor working from the same plan may help reduce the risk of gaps between separate providers.

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 Fiduciary Financial Group, 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.

What is the difference between short-term and long-term capital gains tax?

For most capital assets, a gain recognized after holding the asset one year or less is short-term and generally taxed at ordinary income-tax rates. A gain recognized after holding it more than one year is long-term and may qualify for the 0%, 15%, or 20% federal long-term capital gains rates, depending on taxable income and filing status. (IRS Publication 550; IRS Revenue Procedure 2025-32, as of September 9, 2026.)

Are RSUs taxed twice?

Generally, no. RSUs are generally taxed as ordinary income on Form W-2 when they vest and settle. A later sale may create capital gain or loss only on the change in value after settlement, because the settlement-date value is generally the basis. A sale at that same value generally produces no additional gain or loss.

When does the holding period begin for RSUs and NSOs?

For RSUs, the capital-gains holding period generally begins when shares vest and settle, not on the grant date. For NSOs, it generally begins when the option is exercised. Shares held more than one year after the applicable date may qualify for long-term treatment on later appreciation.

What are the 2026 long-term capital gains tax rate thresholds?

For tax year 2026, the 0% rate generally applies to taxable income up to $49,450 for single filers and $98,900 for married couples filing jointly. The 15% rate generally applies up to $545,500 for single filers and $613,700 for married couples filing jointly, with the 20% rate generally applying above those thresholds. These are federal thresholds, and other taxes or special capital-gain rules may apply. (IRS Revenue Procedure 2025-32, as of September 9, 2026.)

Should I hold employer stock to reach a long-term capital gains rate?

A lower tax rate on future appreciation is not, by itself, a reason to hold employer stock. Holding may increase exposure to a single company, and the share price could decline before the holding period is met. A decision should weigh potential tax treatment against the size of the position, liquidity needs, trading restrictions, and broader financial goals.

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

Employers may use the IRS optional flat withholding rate for supplemental wages, while your final tax liability depends on your full-year income, deductions, filing status, and state taxes. Withholding is a prepayment, not the final determination of tax due. A projection can help identify whether additional wage withholding or estimated payments may need consideration. (IRS Publication 15; IRS Form 1040-ES, as of September 9, 2026.)