Equity Compensation Tax Guide

Equity compensation rarely creates just one tax event.

An award can begin as compensation, become stock, create a second tax system such as AMT, and eventually produce a capital gain or loss. Add withholding, private-company liquidity constraints, or a move between states, and one grant can produce several separate tax questions.

The useful way to analyze equity compensation is as a lifecycle:

award → vesting or exercise → compensation → stock ownership → sale

The tax rules change as the equity moves through that sequence.

Start with the instrument

RSUs and restricted stock sound similar but follow different tax mechanics. Nonqualified stock options and incentive stock options can look economically similar while producing different treatment at exercise. A qualified ESPP has its own statutory holding-period rules.

Start with the page for the instrument you actually hold.

Then follow the stock

Once compensation becomes stock, cost basis matters. The amount already taxed as compensation can become part of basis, and broker-reported basis does not always capture the full adjustment.

Withholding is another separate question. The amount an employer collects during a vest, exercise, or liquidity event is a payment toward tax—not a calculation of the final liability.

When the lifecycle gets more complex

Private-company equity adds valuation, Section 409A, delayed settlement, tender offers, option cancellations, and liquidity constraints.

Employees who work or move across state lines can face another layer because states do not use one national formula for sourcing equity compensation.

Use the pages below to follow the part of the lifecycle that applies to your award.