Strategic Tax Decisions With Stock Options and RSUs
The golden handcuffs of stock options and RSUs can be powerful motivators. They are often the reason tech leaders stay the course (and, perhaps, accept a 9-9-6 schedule) while working toward a life-changing vesting or liquidity event. But that moment rewards execution, not just effort. Yes, you put in the hours, but did you have the right plan in place to reap the benefits? The difference between a windfall and a missed opportunity can often depend on your equity compensation tax strategy.
Stock Options: Incentive Stock Options (ISOs) vs. Non-Qualified Stock Options (NSOs)
On the liquidity front, both ISOs and NSOs require a cash outlay to exercise. While a same-day sale or cashless exercise can make things easier, it can also mean missing out on the more favorable long-term capital-gains tax treatment. It can be helpful to model the cash impact, especially on larger grants, before exercising to ensure you have the liquidity to cover the strike price and taxes.
RSUs: A staple in tech compensation
Unlike stock options, RSUs automatically deliver value as they vest and are taxed as ordinary income — a classic good-news/bad-news scenario. The good news: you don’t have to do anything to realize value once they vest. The bad news: if you hold on to those shares, your wealth may quickly become concentrated in a single stock.
Even if your company is performing well, no stock is immune to volatility. If your income and investments are in lockstep, a downturn may hit twice as hard. You need a plan to manage that concentration risk. You may do this gradually through scheduled sales, a 10b5-1 trading plan, or more advanced strategies like exchange funds or long/short tax-loss harvesting SMAs that help diversify while balancing taxes and long-term goals.
Strategic exercise decisions for ISOs vs. NSOs
Deciding when to exercise stock options may be as crucial as the compensation itself.
If exercised and held for the required period, your ISOs may be subject to long-term capital-gains rates, which are significantly lower than ordinary income tax rates. Exercising NSOs at a time when your income is lower may reduce your tax burden. Look at your immediate future and see if there is an event that reduces your income (think sabbatical, family leave) or an event where a significant salary increase (think promotion) makes now the right time to take the tax burden.
Tax implications and planning
The increase in income from vesting or exercising may put you in a higher tax band. Strategic planning can involve the following approaches (the examples below are hypothetical and for illustrative purposes only).
1. Time exercise of options around other income fluctuations
By exercising a portion of non-qualified stock options (NSOs) during a lower-income year, you may be able to recognize that income at a reduced marginal tax rate, lowering your overall tax burden while preserving liquidity for personal or family goals. With careful coordination, these quieter income periods can become strategic moments to advance long-term wealth-building and tax efficiency.
2. Utilize tax-loss harvesting to offset capital gains
Market volatility can be unsettling, but it can also open the door to smart tax strategies. When some investments decline in value while other assets — like restricted stock units (RSUs) — generate taxable income, tax-loss harvesting can help restore balance.
By intentionally realizing certain losses, you can offset capital gains from appreciated shares or vested RSUs, reducing your overall tax exposure. Working with an advisor to identify and harvest losses thoughtfully helps maintain your long-term investment strategy while smoothing the tax impact of a strong equity year.
3. Consider Alternative Minimum Tax (AMT) when exercising ISOs
A staggered approach to exercising incentive stock options can be a smart way to manage risk — helping you stay below AMT thresholds, preserve cash flow, and maintain flexibility as your company’s valuation evolves. Exercising too many ISOs at once can trigger the alternative minimum tax (AMT).
When exercising ISOs triggers the AMT, it’s important to remember that the extra tax paid isn’t lost. Instead, it creates an AMT credit for future years to offset regular income tax once your AMT liability falls below your standard tax level, often after selling the ISO shares. This credit carries forward indefinitely, gradually reimbursing you for the prior AMT paid.
Managing the timing of exercises and future income can make AMT recovery smoother and faster. Working with an advisor to develop a phased strategy — exercising portions of options over several years — helps reduce exposure to the AMT in the first place while positioning you to take advantage of AMT credits more efficiently as your financial situation evolves.
Integrating equity compensation with charitable giving and estate planning
For those with philanthropic goals, donating appreciated stock or RSUs after vesting can deliver significant tax savings while supporting meaningful causes. In some cases, donor-advised funds (DAFs) or charitable remainder trusts (CRTs) may allow you to diversify highly appreciated stock while deferring or reducing taxes.
Effectively managing stock options and RSUs is not just about understanding these benefits, but also about making strategic decisions that align with both immediate financial needs and long-term objectives. As concentration risk increases, liquidity planning and charitable integration become equally important as tax efficiency.
Whether it’s deciding the right time to exercise options or planning for the tax implications of RSU vesting, a nuanced approach tailored to your unique financial situation is critical. Engaging with a financial advisor who understands the complexities of tech executive compensation packages can provide invaluable guidance throughout this process.
The information contained in this document is provided for informational purposes only and should not be construed as individualized advice. For individualized advice, please consult with your adviser..
