Employee stock capital gains tax applies to the profit you make when you sell shares your employer gave you, measured from the moment those shares became yours to keep. The rate depends on how long you held them after that moment: more than a year gets you long-term rates of 0%, 15%, or 20%; anything shorter is taxed as ordinary income. The trap most people fall into is not the rate itself. It’s the cost basis on the broker’s tax form, which is often too low and quietly doubles the tax on shares you already paid income tax on once.
Every form of employee equity moves through two tax layers. First, at some trigger point — usually exercise or vesting — part of the value is treated as compensation for your work, and you pay ordinary income tax on it through your W-2. After that, the shares are a regular investment. Any further price movement is a capital gain or loss when you sell.1Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection with Performance of Services Whether that gain is long-term or short-term turns on how long you hold the shares past the trigger.2Office of the Law Revision Counsel. 26 USC 1222 – Other Terms Relating to Capital Gains and Losses
When the Capital Gains Clock Starts
Your holding period doesn’t start at grant. It starts when the shares actually become yours for tax purposes, and that date is different for each type of equity.
Non-Qualified Stock Options
With NSOs, the clock starts on the day you exercise. The spread between the exercise price and fair market value on that day is reported as ordinary income on your W-2.3Internal Revenue Service. Publication 525, Taxable and Nontaxable Income Your cost basis becomes the exercise price plus that reported income. Sell more than a year after exercise and any additional appreciation is a long-term capital gain. Same-day exercise-and-sell usually produces little to no capital gain because your sale price and cost basis are effectively equal.
Incentive Stock Options
ISOs work differently. Nothing is taxed as ordinary income at exercise, and your cost basis stays at the exercise price. To keep the favorable treatment, you have to hold the shares for more than two years from grant and more than one year from exercise.4Office of the Law Revision Counsel. 26 USC 422 – Incentive Stock Options Meet both, and the entire profit (sale price minus exercise price) is a long-term capital gain.
Miss either deadline and you have a disqualifying disposition. The spread at exercise gets reclassified as ordinary income, added to your W-2, and any gain above the exercise-date value is a capital gain. Payroll taxes don’t apply, but you may need estimated tax payments to cover the surprise liability.
Restricted Stock Units
RSUs are the least flexible. Nothing happens at grant. When they vest, the full market value of the shares on the vesting date is ordinary income on your W-2, and that same value becomes your cost basis.1Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection with Performance of Services The capital gains clock starts on the vesting date. Sell that same day and you’ll have essentially no gain. Hold for more than twelve months from vesting to qualify for long-term rates on any appreciation.
Employee Stock Purchase Plan Shares
ESPP shares have two holding periods that both matter: more than one year from the purchase date and more than two years from the offering date.5Internal Revenue Service. Stocks, Options, Splits, Traders 5 Meet both (a qualifying disposition) and you report as ordinary income the lesser of the original discount or the actual gain at sale. Anything above that ordinary income amount is a long-term capital gain. Miss either period and the full discount at purchase becomes ordinary income regardless of what the stock did afterward. It’s even possible to owe ordinary income tax on a disqualifying disposition where the stock has fallen below what you paid.
2026 Long-Term Capital Gains Rates
Long-term rates for 2026 are tiered by taxable income:6Tax Foundation. 2026 Tax Brackets and Federal Income Tax Rates
- 0% on taxable income up to $49,450 (single) or $98,900 (married filing jointly).
- 15% from $49,451 to $545,500 (single), or $98,901 to $613,700 (married filing jointly).
- 20% above $545,500 (single) or $613,700 (married filing jointly).
Short-term gains on shares held one year or less are taxed at ordinary rates ranging from 10% to 37%. The bracket that applies to your capital gain is based on total taxable income, which means the ordinary income from an exercise or vesting event stacks under your gain and can push it into the higher rate. Timing large sales in the same year as a large vest event is worth planning around.
Higher earners get a second layer: the net investment income tax, a 3.8% surtax on the lesser of net investment income or the amount your modified AGI exceeds $200,000 (single) or $250,000 (married filing jointly).7Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax Employee stock gains count as investment income. The thresholds aren’t inflation-adjusted, so a single large qualifying disposition can push you over.
The Cost Basis Problem That Costs People Thousands
This is where employee stock sellers overpay the most, and it’s baked into how brokers report the sale. For equity compensation granted after 2013, brokers are prohibited from adjusting the cost basis on Form 1099-B upward to include the compensation income you already paid tax on.8Internal Revenue Service. Instructions for Form 1099-B
Here’s how the damage happens. Say your RSUs vested at $50 per share and you paid ordinary income tax on that $50. Your true cost basis is $50. You later sell at $65, so your real capital gain is $15. But the 1099-B might show a basis of $0 and a gain of $65. Enter those numbers directly into your return and you’ll pay capital gains tax on $65 — meaning you’re paying tax a second time on the $50 that already ran through your W-2.
The fix is to report the correct basis on Form 8949, using Column (g) for the adjustment amount and Code B in Column (f) to flag that the basis reported to the IRS was too low. The adjustment equals the ordinary income already reported on your W-2 for those shares. Your stock plan administrator typically issues a supplemental statement with the adjusted basis. The IRS won’t correct this in your favor, so the responsibility is yours.
For ISO shares sold in a qualifying disposition, the basis is simply the exercise price, since nothing was previously taxed as income. Brokerage commissions and similar transaction costs also get added to basis.
ISO Exercise and the Alternative Minimum Tax
One boundary worth flagging: exercising ISOs and holding the shares looks tax-free on the regular tax side, but the spread at exercise is added back for the alternative minimum tax calculation, even though it’s excluded from regular income. Many ISO holders discover this only when they file.
For 2026, the AMT exemption is $90,100 for single filers and $140,200 for married filing jointly, phasing out at 50 cents per dollar once AMT income exceeds $500,000 (single) or $1,000,000 (joint).9Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 AMT rates run 26% and then 28%. You only owe AMT if it exceeds your regular federal tax. Any AMT paid becomes a minimum tax credit that can offset regular tax in future years. Selling the ISO shares in the same calendar year as the exercise eliminates the AMT adjustment entirely, at the cost of ordinary income treatment on the spread.
The Wash Sale Rule on Company Stock
If you sell company shares at a loss and acquire substantially identical stock within 30 days before or after the sale, the loss is disallowed.10Office of the Law Revision Counsel. 26 USC 1091 – Loss from Wash Sales of Stock or Securities That creates a 61-day blackout window in total. The disallowed loss is added to the basis of the replacement shares, so the tax benefit is deferred rather than lost — usually.
Employee stock holders trip this rule more often than they realize. An ESPP purchase inside the 30-day window can trigger a wash sale on shares you sold at a loss. Another option exercise on the same company’s stock can too. RSU vesting may or may not count as a purchase for this rule; the IRS hasn’t given definitive guidance, so the safe approach is to keep loss sales clear of any window where new company shares will land in your account.
One harsh version: if the replacement shares are bought inside an IRA, the disallowed loss doesn’t get added to any basis you can eventually use. That loss is gone for good.
Reporting the Sale
A sale of employee stock hits your return in two places. The ordinary income from exercise or vesting is already on your W-2 and flows into Form 1040 as wages. The capital gain or loss goes on Schedule D, with the underlying detail on Form 8949.
Your employer files supporting forms with the IRS. For ISOs, that’s Form 3921, showing grant date, exercise date, exercise price, fair market value at exercise, and share count. For ESPP purchases, it’s Form 3922, with grant-date and exercise-date fair market values.11Internal Revenue Service. Instructions for Forms 3921 and 3922 Keep them; the IRS uses them to check your return against what your employer reported.
Hold your records for at least three years after filing the return that reports the sale. Longer is better when basis traces back to grants or exercises from earlier years. Worth keeping: option grant agreements, exercise confirmations, RSU vesting statements, Forms 3921 and 3922, brokerage 1099-Bs, stock plan administrator supplemental statements, and any 83(b) election filings. If the IRS questions the gain you reported, the burden of proving your cost basis sits with you.