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

Tech professionals at companies 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 how long you hold the underlying shares before selling.

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 substantially lower: 0%, 15%, or 20% depending on your taxable income, making the holding period a critical planning variable.

The general rule: to qualify for long-term capital gains tax treatment, you must hold the asset for more than one year before selling. The holding period starts on the day after you acquire the asset and ends on the day you sell.

For RSUs, this rule has an important nuance: the holding period begins at vesting, not at the grant date. When an RSU vests, the shares are treated as ordinary income at the fair market value on that date (and your employer typically withholds shares to cover the income tax). The capital gains clock starts from vesting. If you sell immediately at vesting, the entire gain is ordinary income. If you hold for more than a year after vesting and the stock appreciates, that incremental gain may qualify for long-term capital gains treatment.

For Non-Qualified Stock Options (NSOs), the holding period also starts at exercise, not grant. When you exercise an NSO, the spread (stock price minus exercise price) is ordinary income. Post-exercise, the shares need to be held more than one year for any further appreciation to be taxed at long-term capital gains rates.

For Incentive Stock Options (ISOs), the rules are more complex and more favorable, but they come with trade-offs. To achieve what the IRS calls 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, a potentially significant tax benefit. If either condition is not met (a “disqualifying disposition”), part or all of the gain reverts to ordinary income treatment. There is, however, an important trade-off: the spread at exercise, even if you don’t sell, may be subject to the Alternative Minimum Tax (AMT), a separate tax system that can create a substantial tax bill in the year of exercise. This AMT consideration is a core reason ISO strategy requires careful, forward-looking planning.

The federal long-term capital gains tax rate you pay depends on your total taxable income for the year. Below are the current bracket thresholds. Note that these are federal rates only, state income taxes apply separately and vary significantly by state (California, for example, taxes capital gains at ordinary income rates). The figures below are current as of the cited dates and subject to change; confirm specifics with a tax professional for your situation.

Tax Year 2025 (returns filed in 2026):
Source: IRS Topic No. 409, Capital Gains and Losses (as of Feb. 25, 2026)

Tax Year 2026 (inflation-adjusted):
Source: IRS Revenue Procedure 2025-32, IRS Newsroom: “IRS releases tax inflation adjustments for tax year 2026” (published Oct. 9, 2025)

In addition to these rates, higher-income taxpayers may also be subject to a 3.8% Net Investment Income Tax (NIIT) on 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 scenarios for an RSU holder at a tech company:

• Sell at vesting: Shares are sold immediately. The spread at vesting is already taxed as ordinary income. There is no additional capital gain, so no capital gains rate applies to the vesting event itself. This is the simplest approach and avoids concentration risk, but it also forecloses any potential long-term capital gains treatment on future appreciation.
• Hold after vesting: You keep the shares after vesting and sell more than one year later. The original spread at vesting is still ordinary income, but any appreciation above that vesting price, if the stock has risen, may qualify for long-term capital gains treatment. The tradeoff: you remain exposed to company stock risk during the holding period.

For ISO holders, the tradeoff is somewhat different. Exercising early (well before a planned sale) could 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 an AMT liability even if no shares are sold. The actual tax impact depends on factors including your total income, other deductions, and whether you carry forward an AMT credit from prior years.

These scenarios illustrate considerations and tradeoffs, not guaranteed outcomes. The optimal timing for any individual depends on factors including stock price, income in the exercise or vest year, anticipated future income, the overall tax picture, and risk tolerance.

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. For tech professionals at companies like those already featured among FFG’s client employers, several moving pieces typically require coordination:

• RSU withholding gaps. When RSUs vest, employers withhold a fixed percentage for federal taxes, often 22% for supplemental income. For high earners, the actual marginal rate may be significantly higher. Without monitoring this gap across multiple vest events, a large unexpected tax bill in April is a real possibility.
• 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 pull the trigger is essential. This typically involves projecting your regular tax liability, your tentative minimum tax, and whether any AMT credit from prior years may offset new AMT.
• Charitable and gifting strategies. Donating appreciated shares (rather than cash) to a donor-advised fund or qualified charity may allow you to avoid recognizing capital gains on the donated shares and take a charitable deduction at fair market value, depending on individual tax circumstances. Gifting shares to family members is another tool that may be appropriate depending on estate planning goals and the recipient’s tax situation.
• Coordinating with year-end tax prep. Because equity events (vesting, exercises, sales) generate specific tax forms (W-2 additions, Form 3921 for ISOs, Form 1099-B for sales), and 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.

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

This article is for educational purposes only and does not constitute tax or investment advice. Tax laws are subject to change, and the impact of any strategy depends on individual circumstances. Consult a qualified tax professional for guidance specific to your situation. Federal rates cited are sourced from IRS publications as noted above. State and local taxes may apply separately.