Deciding what to do with company stock comes down to four things: knowing which type of grant you hold, understanding when and how it gets taxed, selling on a schedule that trims your concentration without creating avoidable tax pain, and meeting the deadlines and paperwork that most people miss. Get those right and equity compensation becomes one of the most powerful wealth builders available. Get any of them wrong and you can lose real money to taxes, forfeited shares, or a stock price that turns before you diversify.
Know What You Actually Hold
Every decision starts with identifying the grant. The award agreement or your equity administration portal will spell out the specifics: number of shares or options, strike price if applicable, expiration dates, and any conditions.
- Restricted Stock Units (RSUs) are a promise to deliver actual shares once you satisfy a vesting condition, usually continued employment. You don’t own anything until the shares vest and land in your brokerage account.
- Incentive Stock Options (ISOs) give you the right to buy shares at a fixed strike price set on the grant date. They’re reserved for employees and carry tax advantages if you meet holding requirements.
- Non-Qualified Stock Options (NQSOs) work like ISOs mechanically but are available to contractors, directors, and consultants too. The tax treatment is less favorable but simpler.
- Employee Stock Purchase Plans (ESPPs) use payroll deductions to buy company shares at a discount, typically 15% below fair market value. Qualified plans offer additional tax benefits if you hold long enough.
- Performance Stock Units (PSUs) resemble RSUs but only vest if the company hits specific targets like revenue growth, EPS, or total shareholder return. Payouts can range from zero to well above the target number of shares.
When Your Shares Actually Become Yours
Vesting determines when your equity is really yours. Before that date, it’s a promise that can evaporate if you leave.
Cliff vesting delivers nothing until you hit a milestone, often one year of employment, at which point a large block vests all at once. Graded vesting releases shares in smaller increments, such as monthly or quarterly across three or four years, and it’s the most common structure. Double-trigger vesting requires two events before acceleration kicks in, typically the sale of the company followed by your involuntary termination within a set window (often 9 to 18 months). Double-trigger structures show up frequently in acquisition scenarios and protect employees who lose their jobs after a merger.
What the Tax Bill Looks Like
Every grant type is taxed differently, and the differences are large enough to change your strategy.
RSUs
RSUs are taxed as ordinary income on the day they vest. The full fair market value of the delivered shares counts as wages, and your employer withholds income tax, Social Security, and Medicare just like a paycheck. For 2026, the top federal income tax rate is 37% for single filers with income above $640,600 ($768,700 for married couples filing jointly).1Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 Anything the shares gain or lose after vesting is a capital gain or loss when you sell.
Incentive Stock Options
ISOs create no regular income tax event at exercise, which is what makes them attractive. To keep that favorable treatment, you must hold the shares at least two years after the grant date and one year after exercise.2Office of the Law Revision Counsel. 26 USC 422 – Incentive Stock Options Meet both holding periods and the entire profit is taxed at long-term capital gains rates, which top out at 20% for 2026, rather than at ordinary rates as high as 37%. Sell too early (a “disqualifying disposition”) and the spread between your strike price and the market value at exercise gets reclassified as ordinary income.
Non-Qualified Stock Options
NQSOs are simpler but hit harder at exercise. The spread between the strike price and the market price on the exercise date is taxed as ordinary income immediately, and it’s subject to Social Security and Medicare taxes as well. Your employer generally handles withholding at the time of exercise. Any additional gain after exercise is a capital gain when you sell, at a rate that depends on how long you hold.
Employee Stock Purchase Plans
Qualified ESPP shares receive favorable treatment if you hold them for two years from the offering date and one year from the purchase date.3Office of the Law Revision Counsel. 26 USC 423 – Employee Stock Purchase Plans Meet those holding periods and the discount (up to 15%) is taxed as ordinary income while the remaining gain qualifies for long-term capital gains rates. Sell before the holding periods are up and a larger portion gets taxed as ordinary income.
Watch Out for AMT on ISOs
ISOs don’t trigger regular income tax at exercise, but the spread between the strike price and fair market value counts as a preference item for the Alternative Minimum Tax. The AMT is a parallel calculation that adds back certain items the regular system excludes. You compute both, then pay whichever is higher.
This catches people off guard. If you exercise a large batch of ISOs in a year when the stock has climbed well above your strike price, the AMT bill can be enormous even though you haven’t sold a share and have no cash to pay it. Model the AMT exposure before exercising, especially when the spread is large. Tax software and most CPAs can run both calculations side by side. If the AMT does apply, you may receive an AMT credit that offsets regular taxes in future years, but the cash flow hit in the exercise year is real.
Elections and Strategies That Can Save You Money
The Section 83(b) Election
If you receive restricted stock (actual shares subject to a vesting schedule, not RSUs), you can file a Section 83(b) election within 30 days of receiving the shares to pay income tax on their current value instead of waiting until they vest.4Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection With Performance of Services The bet is that the stock will appreciate and you’d rather pay tax on a low value now than a high value later. If it does go up, all the growth after your election is taxed at capital gains rates rather than ordinary income. The risk is that if the stock drops or you leave before vesting, you’ve paid tax on something you never actually received, and there’s no deduction for the forfeiture. Once filed, the election cannot be revoked.
The Section 83(i) Deferral for Private Company Stock
Employees at private companies face a specific problem: shares from option exercises or RSU settlements may have real taxable value with no market to sell into for the tax bill. Section 83(i) lets eligible employees of qualifying private companies defer the federal income tax on that stock for up to five years after it would otherwise be taxable.4Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection With Performance of Services The election must be filed within 30 days of the triggering event. Federal payroll taxes still apply immediately, and some states don’t honor the deferral. The company also has to meet requirements, including offering equity broadly to at least 80% of its employees.
Net Unrealized Appreciation in Retirement Plans
If your employer’s 401(k) plan holds company stock, the net unrealized appreciation (NUA) strategy can save significant taxes at retirement. Instead of rolling the whole 401(k) into an IRA, where all withdrawals get taxed as ordinary income, you can distribute the company stock in kind to a taxable brokerage account as part of a lump-sum distribution. You pay ordinary income tax only on the stock’s original cost basis in the plan, and the appreciation above that basis is taxed at long-term capital gains rates when you eventually sell, no matter how soon after distribution. The catch: you must take a complete lump-sum distribution of all assets in the plan, and the strategy only makes sense when the appreciation is large relative to the cost basis.
How to Sell Your Shares
Exercise and Sale Methods
When you convert equity into cash, most company platforms offer a few standard methods:
- Sell to cover. The broker sells just enough shares to pay the exercise price (for options) and required tax withholding, and deposits the remaining shares into your account. Common choice if you want to keep some exposure.
- Cashless exercise. All shares are sold immediately and you receive the net cash proceeds after taxes and exercise cost. You walk away with cash and no remaining position.
- Cash exercise. You pay the exercise price out of pocket and keep every share. Requires available cash but gives you full control over when to sell.
Default tax withholding on these transactions is typically 22% for supplemental wages, or 37% if your supplemental wages exceed $1 million in the calendar year.5Internal Revenue Service. 2026 Publication 15 That 22% often isn’t enough if you’re in a higher bracket. Set aside additional funds or adjust your estimated tax payments to avoid an underpayment penalty at filing time.
The Wash Sale Trap
Sell company stock at a loss and acquire substantially identical shares within 30 days before or after that sale, and the IRS disallows the loss deduction.6Office of the Law Revision Counsel. 26 USC 1091 – Loss From Wash Sales of Stock or Securities With equity compensation this matters more than people realize, because an option exercise counts as a purchase. Sell company shares at a loss on Monday and exercise options on the same stock two weeks later, and the wash sale rule kicks in. The disallowed loss gets added to the cost basis of the replacement shares, so it’s not lost forever, but you can’t use it on the current return. Watch the calendar around ESPP purchase dates and option exercises.
Blackout Windows
Vested shares don’t guarantee you’re free to sell whenever you want. Most public companies impose blackout periods around earnings announcements, typically starting a few weeks before quarter-end and lifting a day or two after earnings are released. Your compliance team usually sends alerts when the window opens and closes. Senior executives and directors often use Rule 10b5-1 trading plans to sell on a pre-determined schedule; the SEC requires a cooling-off period before the first trade can execute.7U.S. Securities and Exchange Commission. SEC Adopts Amendments to Modernize Rule 10b5-1 Insider Trading Plans and Related Disclosures For most employees, the main task is simply respecting the blackout windows.
Reporting It Correctly
Equity compensation generates paperwork beyond your W-2, and one common form error costs people real money on their returns.
- Form W-2. RSU income at vesting and NQSO spread at exercise both appear in Box 1 as wages. Withholding amounts that don’t match your regular paycheck math are usually why.
- Form 3921. Filed by your employer when you exercise ISOs. It reports grant date, exercise date, exercise price, and fair market value at exercise. You don’t attach it to your return, but you need the data for AMT calculations and holding period tracking.8Internal Revenue Service. Instructions for Forms 3921 and 3922
- Form 3922. Issued on the first transfer of ESPP shares. Informational. Keep it to calculate cost basis when you sell.
- Form 1099-B. Sent by your broker after you sell. Reports proceeds and may include cost basis, but the cost basis on equity compensation shares is frequently wrong or incomplete because the broker doesn’t always account for income you already reported at vesting or exercise.
That last point is where most people get burned. Sell RSU shares and your 1099-B shows a cost basis of zero (or the original grant price rather than the fair market value at vesting), and you’ll appear to owe far more capital gains tax than you actually do. You correct this on Form 8949 by reporting the adjusted basis, then carry totals to Schedule D.9Internal Revenue Service. Stocks (Options, Splits, Traders) 5 Keep your own records of fair market value on each vesting date. That makes the correction straightforward instead of a scramble at tax time.
What Happens If You Leave
Leaving the company, voluntarily or not, has immediate consequences for both vested and unvested equity.
Unvested shares are almost always forfeited. RSUs, PSUs, or options that haven’t vested typically disappear if you resign, get laid off, or are terminated. Some agreements carve out exceptions for retirement, disability, or death, but standard departures forfeit everything unvested. Termination for cause can be harsher, sometimes clawing back vested shares or options too.
Vested stock options have a limited exercise window after departure. For ISOs, federal tax law requires exercise within three months of leaving to preserve ISO tax treatment.2Office of the Law Revision Counsel. 26 USC 422 – Incentive Stock Options After that 90-day window, unexercised ISOs convert to NQSOs, meaning the spread at exercise is taxed as ordinary income instead of qualifying for capital gains treatment. Your plan may give you a longer contractual window to exercise (sometimes up to a year for NQSOs), but the ISO tax benefit expires at 90 days regardless of what the plan says.
Vested RSU shares are yours. Once they’ve vested and settled into your brokerage account, they’re ordinary shares of stock. Leaving doesn’t affect them. Keep, sell, or transfer on your own timeline, subject only to any insider trading restrictions that may still apply during a post-departure cooling-off period.
Don’t Let It All Ride on One Stock
This is the part most people skip until it’s too late. When equity compensation performs well, it can quietly grow into an outsized portion of your total wealth. Having 40% or 60% of your net worth in one company means your financial life rises and falls with a single stock. That isn’t investing; it’s a concentrated bet on your employer, and your income already depends on that same company.
Concentration risk has destroyed wealth repeatedly, and not just at small companies. Employees at large, seemingly stable firms have watched retirement savings collapse when the stock cratered. FINRA flags company stock concentration as a specific risk factor for employees who funnel retirement savings into their employer’s shares.10FINRA. Concentrate on Concentration Risk
A common guideline is to keep any single stock below 10% to 15% of your total portfolio, though the right number depends on your overall picture. Diversifying doesn’t mean dumping every share the moment it vests. It means having a systematic approach: selling a fixed percentage at each vesting event, setting price targets for trimming, or scheduling regular sales through a 10b5-1 plan if you’re subject to insider trading rules. The goal is reducing exposure over time so that a bad quarter doesn’t derail your plans. Taxes matter in that calculation, and selling at the wrong moment can create an unnecessary bill, but paying some capital gains tax is almost always better than riding a concentrated position into a downturn.
When Options Go Underwater
Stock options are “underwater” when the current market price drops below your strike price, so exercising would mean paying more than the shares are worth on the open market. There’s nothing to do with underwater options except wait for a recovery or let them expire. Some companies offer repricing programs during sustained downturns, but they typically require shareholder approval and may come with restarted vesting or fewer shares. Don’t count on your employer offering one.