Profit from selling IPO shares is taxed as a capital gain at the federal level, and the tax on IPO profit runs from 0% to 23.8% for shares held more than a year, or as high as 40.8% for shares sold within a year. The rate depends on your holding period, your total income, and whether you cross the thresholds that trigger a 3.8% surtax. Most states add their own income tax on top.
Short-Term vs. Long-Term Rates
The biggest factor in your bill is how long you owned the shares before selling. The holding period starts the day after you buy and ends the day you sell. Sell within one year and the profit is a short-term capital gain, taxed at your ordinary income rate, which in 2026 runs from 10% to 37%.1Office of the Law Revision Counsel. 26 USC 1222 – Other Terms Relating to Capital Gains and Losses
Hold for more than a year and the profit qualifies as a long-term capital gain, taxed at 0%, 15%, or 20% depending on your taxable income and filing status.2Internal Revenue Service. Topic No. 409, Capital Gains and Losses For 2026, the 0% rate applies to taxable income up to $49,450 for single filers, $98,900 for joint filers, and $66,200 for heads of household. The 15% rate runs up to $545,500 single, $613,700 joint, and $579,600 head of household. Income above those ceilings is taxed at 20%. The thresholds adjust each year for inflation.
One day matters. Selling on the 365th day after purchase is short-term; waiting until day 366 drops you into long-term treatment. For a top-bracket taxpayer, that single day can roughly halve the federal rate on the gain.
The 3.8% Net Investment Income Tax
Capital gains from IPO shares can trigger a second federal tax. If your modified adjusted gross income exceeds $200,000 single, $250,000 joint, or $125,000 married filing separately, you owe an additional 3.8% on your net investment income.3Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax Stock sale gains count as net investment income.4Internal Revenue Service. Net Investment Income Tax
The tax applies to the smaller of your net investment income or the amount your MAGI exceeds the threshold. A large IPO gain can push you over the line even when your salary alone wouldn’t. In practice, the top federal rate becomes 23.8% on long-term gains (20% plus 3.8%) and 40.8% on short-term gains (37% plus 3.8%). These thresholds are not indexed for inflation, so more taxpayers cross them each year.
How to Calculate Your Cost Basis
Your taxable profit is what you received when selling minus what you originally paid. That original price is your cost basis. Bought shares directly in the IPO at the offering price? Your basis is that price times the number of shares. Bought on the open market after trading began? Your basis is whatever you paid then.5Internal Revenue Service. Topic No. 703, Basis of Assets
Trading commissions and transfer fees get added to basis, which trims the taxable gain. Basis also shifts with stock splits and reinvested dividends. Keep your trade confirmations and brokerage statements; you may need them years later.
If you bought shares in multiple lots and only sell some, you have to identify which shares you sold. Most brokerages default to first-in, first-out, treating the earliest purchases as sold first.6Internal Revenue Service. Stocks (Options, Splits, Traders) 3 You can specifically identify a different lot, say the one with the highest basis, but you have to make that call at the time of sale, not after.
If You Sold at a Loss
Not every IPO works out. A sale below your basis produces a capital loss, which offsets capital gains from elsewhere in the year. If losses exceed gains, you can deduct up to $3,000 of the excess against ordinary income ($1,500 if married filing separately), and unused losses carry forward indefinitely.7Office of the Law Revision Counsel. 26 USC 1211 – Limitation on Capital Losses
Watch the wash sale rule. If you buy substantially identical shares within 30 days before or 30 days after the loss sale, the loss is disallowed for that year.8Office of the Law Revision Counsel. 26 USC 1091 – Loss From Wash Sales of Stock or Securities The disallowed amount is added to the basis of the replacement shares, so the benefit is deferred rather than lost, but you can’t claim the deduction now.
If You Got Your Shares From an Employer
Employees who received equity from a newly public company face rules that stack on top of the capital gains rules above. The type of equity, when it vests, and when you exercise all create separate tax events.
Restricted Stock Units
RSUs are taxed as ordinary income on the vesting date, based on the market value that day. Employers usually withhold by holding back shares, often at a flat 22% federal rate. The vesting-date value becomes your cost basis for future capital gains. If the stock rises from $50 at vesting to $80 when you sell, capital gains tax applies to the $30 per share, with the rate set by how long you held after vesting.
Pre-IPO companies often use double-trigger RSUs that vest only after both a time requirement and a liquidity event. A post-IPO lock-up, typically 90 to 180 days, does not delay the tax. If RSUs vest at the IPO, you owe income tax on the vesting date even though you can’t sell yet. Some plans set the second trigger to coincide with lock-up expiration; many don’t. Read your plan documents before assuming you have time to raise cash for the tax.
Stock Options
Non-qualified stock options trigger ordinary income tax at exercise, on the spread between the market price and your strike price. Options with a $10 strike exercised when the stock trades at $40 create $30 per share of ordinary income. Any further gain above $40 when you eventually sell is a capital gain.9Internal Revenue Service. Topic No. 427, Stock Options
Incentive stock options work differently. Regular income tax is generally not due at exercise. To keep the full profit at long-term capital gains rates, you have to hold the shares at least two years after grant and at least one year after exercise.10Office of the Law Revision Counsel. 26 US Code 422 – Incentive Stock Options Sell before meeting both holding periods and it becomes a disqualifying disposition, with part of the gain converted back to ordinary income.
ISOs carry a hidden Alternative Minimum Tax cost: the spread at exercise is an AMT preference item. You can owe AMT on gain you haven’t cashed out, which becomes painful if the stock later drops before you sell.11Internal Revenue Service. Topic No. 559, Net Investment Income Tax
The Section 83(b) Election
If you received restricted stock (actual shares subject to vesting, not RSUs), you can file a Section 83(b) election to pay income tax on the shares immediately at their current value instead of waiting for vesting.12Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection With Performance of Services For early startup employees, this can be a large saver: if you receive shares worth $0.10 each and the company later goes public at $50, the election locks in ordinary income tax on $0.10 and lets the rest grow at capital gains rates.
The deadline is strict. You have to file the election with the IRS within 30 days of receiving the shares.13Internal Revenue Service. Form 15620, Section 83(b) Election Miss it and the option is gone. The risk is that if the company fails or the shares lose value, you’ve paid tax on income you never received, and you can’t recover it.
The Section 1202 Exclusion for Early Investors
If you bought shares directly from a qualifying C corporation before it went public, a substantial federal exclusion under Section 1202 may apply. For stock issued after July 4, 2025, the exclusion phases in with holding period: 50% after three years, 75% after four, and 100% after more than five. The cap per company is the greater of $15 million (inflation-adjusted going forward) or ten times your adjusted basis.
To qualify, the company must have had gross assets of $75 million or less (also inflation-adjusted) when it issued your shares, and it must have been an active business in an eligible industry. Finance, professional services, and hospitality are among the excluded sectors. The holding period runs from when the stock was issued to you, not from an option exercise or debt conversion. If Section 1202 might apply, this is worth reviewing with a tax professional before selling, because it can eliminate federal tax on millions in gain.
Paying Tax Before April
Federal tax is pay-as-you-go, and a large mid-year gain can create an underpayment penalty even if you settle up by April.14Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty You avoid the penalty if you meet a safe harbor: you owe less than $1,000 after withholding and credits, you’ve paid at least 90% of the current year’s liability, or you’ve paid at least 100% of last year’s total tax (110% if your prior-year AGI exceeded $150,000).15Internal Revenue Service. 2026 Form 1040-ES For someone with a normal salary and a sudden windfall, the prior-year safe harbor is usually the easiest to hit, since wage withholding already covers last year’s tax.
Estimated payments are due April 15, June 15, September 15, and January 15 of the following year.15Internal Revenue Service. 2026 Form 1040-ES Making a single large estimated payment right after the sale is usually the cleanest approach.
Reporting the Sale
Each sale is reported on Form 8949, which asks for acquisition date, sale date, proceeds, and cost basis, with transactions split into short-term and long-term sections.16Internal Revenue Service. Instructions for Form 8949 The totals flow to Schedule D of Form 1040.
Your brokerage will send Form 1099-B after year-end, showing gross proceeds and, for covered securities, the cost basis.17Internal Revenue Service. Instructions for Form 1099-B Check those numbers against your own records. Brokerages often report an incorrect basis for shares acquired through employee compensation plans, because the 1099-B basis may not include the income you already paid tax on at vesting or exercise. If you don’t adjust the figures, you can end up paying tax twice on the same money.
The filing deadline for most individual returns is April 15.18Internal Revenue Service. When to File The failure-to-pay penalty runs 0.5% of the unpaid balance per month, capped at 25%, plus interest that compounds until paid.19Internal Revenue Service. Failure to Pay Penalty
State tax adds another layer. Roughly 40 states tax capital gains as ordinary income. A few exempt long-term gains or apply reduced rates; others match their top income bracket, which can exceed 13% in the highest-tax states. Check your state’s rules before assuming the federal bill is the whole picture.