Tax Tips And Warnings For IPO Company Employees And Their Advisors

Moving States Now Does Not Impact Taxes As Expected

Whatever state you lived in while your equity compensation vested is going to want its cut of income from your stock option exercise or RSU vesting. Therefore, moving from California, New York, or Massachusetts to a no-income-tax state such as Nevada, New Hampshire, Texas, or Florida will make a difference only on the portion of your grants that has not fully vested.

The good news? Once you’re in that new location, after you own the shares you will probably avoid state capital gains tax when you sell the stock.

Stock From Early Startup Stage, Donations, Small Gifts, And Death Are The Simplest Ways To Avoid Taxes On Appreciated Shares

If you joined the company early enough, you may have what’s called Qualified Small Business Stock (QSBS). You need to have (1) acquired the stock when the company had aggregate gross asset value of $50 million or less and (2) held the shares (not unexercised options) at least five years. As long as you meet the criteria, your capital gains will avoid taxes.

Check whether you own these types of shares and have the documentation to support QSBS tax treatment. While the tax law of 2025 led to some modifications in the QSBS rules, the tax changes apply only to shares acquired after that law was enacted. (See my Forbes.com article on those QSBS changes: ‘Big Beautiful Bill’ Affects Tax Planning For Stock Options And RSUs.)

With a stock donation, assuming you’ve held the shares for at least one year, you can get a tax deduction for the full fair market value and avoid needing to first sell the stock. When the value of the deduction is over 30% of your adjusted gross income, you will be required to carry some of it forward for up to 5 years.

Another way to avoid federal taxes is to gift the company shares to a person in a much lower income-tax bracket. When someone in the 12% or lower tax bracket sells the stock, they have a 0% long-term capital gains rate (note: the income for the tax bracket will include the capital gains). In 2026, you can gift up to $19,000 (twice that for joint filers) to each individual without impacting your lifetime federal gift/estate exemption. If the gift recipients are younger children, be aware of what’s called the kiddie tax, which limits this strategy.

It’s said that two things in life are unavoidable: death and taxes. While this is generally true, at death your stock does get what is termed a “step-up” in the tax basis. For example, stock that you acquired at $1 which is worth $500 at your death gets inherited with a $500 basis. That means $499 in taxable income goes away.

Depending on the size of your stock holdings, you may consider more complex gifting, charitable giving, and estate-planning strategies, such as with various types of trusts, to review with an experienced estate-planning lawyer and financial advisor. See my Forbes.com article Estate And Charitable Planning For Stock Options, RSUs, And Company Stock.

Know The Difference Between Tax Deferral And Tax Avoidance

Selling shares to fund your life goals can be the simplest and most effective strategy to reduce your concentrated stock wealth. However, you may instead want to continue to hold your company stock, depending on your confidence level in where it’s headed, or hold another investment. Understand that many tax strategies for diversifying or exchanging stock for another investment—e.g. exchange funds, Section 351 exchange ETFs, variable prepaid forwards, qualified opportunity funds—simply defer tax to the future instead of avoiding it.

Even tax-loss harvesting to create capital losses from your other investments, and then selling your appreciated stock to soak them up, creates only the partial illusion of avoiding taxes. It’s likely you’re reinvesting the proceeds from those loss-making sales into new investments that, when sold, will generate their own capital gains.

Confirm Withholding Rate And Any Elections For Stock Options And RSU

For tax withholding on supplemental wage income, such as from nonqualified stock option exercises and restricted stock unit (RSU) vesting, IRS regulations specify that companies should withhold at 22% for income up to $1 million in a calendar year and at 37% for amounts in excess of $1 million. Most companies going public see little compliance risk in using a much higher withholding rate (also covers any state tax, Medicare, and Social Security up to the yearly maximum), particularly if they grant double-trigger RSUs that vest in the IPO. Confirm what rate your company is using and whether you can elect a higher rate.

Your Capital Gains Rate Is Likely To Be Higher Than You Realize

The top tax rate on long-term capital gains is 20%, and when you pay that rate you trigger the additional 3.8% Medicare tax, called the Net Investment Income Tax (NIIT). For high earners, that makes an effective top capital gains rate of 23.8%.

However, you may pay that additional tax even if you’re in the 15% tax bracket for long-term capital gains, as the NIIT kicks in for yearly modified adjusted gross income (MAGI) of more than $200,000 (more than $250,000 for married joint filers). That would give you an effective capital gains rate of 18.8%.

Also realize that your capital gains are part of the total amount of your income in the calculation of your adjusted gross income (AGI) and eventually what tax bracket you fit into.

Post-IPO Lockup On Stock Sales Does Not Delay Taxes On Equity Comp

A “lockup” after an IPO prohibits employees from selling their shares for an extended time. Even though you cannot sell shares to pay taxes, the lockup does not delay the taxes you owe on income recognized when you exercise stock options or when your RSUs vest, including the alternative minimum tax (AMT) on incentive stock options (ISOs). While this seems illogical, as the stock price could drop by the time you can sell, you will need to find a way to pay those taxes other than selling the locked-up shares.

Exercising And Holding ISOs May Not Be Worth It

ISOs offer tax advantages if everything goes right. However, these options work best when you have little or no spread between the exercise price and the fair market value of the stock at exercise. Otherwise, should the stock price fall while you cannot sell shares during a lockup, you may get caught paying the AMT on paper profits.

Even if that’s not an issue for you, the tax benefits of ISOs may not justify the risks of holding the shares at exercise. The difference may not be that large between (1) your top rate of ordinary income tax you’d pay by selling the stock at exercise and (2) your long-term capital gains rate plus the 3.8% NIIT you’d pay at sale after holding the stock more than two years from grant and one year from exercise.

For more on ISO opportunities and risks, see my Forbes.com article Incentive Stock Options: Tax Strategies From Expert Advisors.

Avoid Tax Shelters That Seem Too Good To Be True

You and your advisors may hear about tax strategies that go beyond risking an IRS audit to risking something much worse.

Just as there are very smart engineers, scientists, and doctors, you’ll meet equally smart lawyers and tax professionals who cleverly work at interpreting our complex tax code to minimize and avoid taxes on great wealth. I’ve known many through the years—including the head of financial planning at a well-known big accounting firm who almost went to prison after prosecutors and the IRS focused on tax shelters they viewed as abusive.

As the US Justice Department press release explained after its successful trial-court verdict on criminal charges (eventually overturned for a few of the criminal defendants):

[Members of this accounting firm’s] national individual tax shelter group…led an effort to design and market tax shelter transactions used by wealthy individuals to eliminate, reduce or defer tax liabilities on annual income that generally exceeded $10 or $20 million. Between 1999 and 2002, tax shelter transactions implemented by the defendants and their co-conspirators generated billions of dollars in non-economic or paper tax losses that were used to offset actual income or gain recognized by the firm’s clients.

The defendants and their co-conspirators—which included tax, accounting and financial industry professionals, and law firms—worked to design, implement and defend the tax shelter transactions in ways intended to conceal the true facts and circumstances of the transactions from the IRS.

Become Knowledgeable

If you work for a company that is preparing for an IPO or just had an IPO, now is the time to become wiser on your own about taxes and your stock compensation—at least enough to spot issues and ask thoughtful questions of professionals. Even when using an experienced financial or tax advisor, which I recommend, explore trusted resources and do the type of research you would for a trip, a hobby, or your health.