When your company goes public, equity that sat on a screen for years turns into real tax liability. The IPO itself, the vesting events tied to it, and the eventual sale of shares each produce a separate tax consequence, and the rules differ sharply depending on whether you hold Non-Qualified Stock Options, Restricted Stock Units, Incentive Stock Options, or restricted stock you filed an 83(b) election on. The most important IPO tax considerations for employees and founders come down to three things: knowing which taxable events fire and when, understanding that employer withholding almost never covers the full bill, and planning share sales around holding periods, the Alternative Minimum Tax, and the 3.8% Net Investment Income Tax. Missteps here routinely produce five- and six-figure surprise tax bills.
How Each Type of Equity Is Taxed When Your Company Goes Public
Your tax treatment depends almost entirely on which instrument you hold. Each has its own trigger for when income is recognized and its own character of income.
Non-Qualified Stock Options
Exercising an NSO creates ordinary income equal to the fair market value on the exercise date minus the exercise price you paid. Your employer reports that spread on your W-2 and withholds federal income tax, Social Security, and Medicare like regular wages.
Timing changes the size of the bill. Exercising before the IPO uses the most recent 409A valuation, which is typically well below the post-IPO trading price. Exercising after the IPO uses the public market price, and the spread, and the tax, grows accordingly.
Restricted Stock Units and Double-Trigger Vesting
Most pre-IPO companies structure RSUs with double-trigger vesting. Nothing vests until two things happen: you satisfy a time-based service condition, and a liquidity event like the IPO occurs. When both conditions are met, the full fair market value of the shares on the vesting date becomes ordinary income on your W-2, subject to payroll tax withholding.
The practical effect is a concentrated income spike. A large block of RSUs can vest all at once at the IPO or when the lock-up expires, pushing you into the top federal bracket on that income alone. Standard withholding rarely keeps up.
Incentive Stock Options
ISOs get preferential treatment, with strict conditions. No regular federal income tax is due at exercise. But the spread at exercise counts as an AMT preference item, and can produce a separate tax bill under the Alternative Minimum Tax.
To qualify for long-term capital gains treatment on the eventual sale, you must hold the shares more than two years after the grant date and more than one year after the exercise date. Selling before you meet both is a disqualifying disposition. The gain, up to the spread at exercise, gets taxed as ordinary income instead of capital gains. The ordinary income piece equals the lesser of the exercise-date spread or the actual gain realized on sale. If the stock drops below your exercise price and you sell at a loss, there is no ordinary income component.
This rule collides with the typical 90-to-180-day IPO lock-up. If you exercised your ISOs less than a year before the lock-up lifts, selling the moment you can triggers a disqualifying disposition. You either take the money at ordinary income rates or keep holding and accept the risk that the price falls.
AMT and the Phantom Income Problem
The Alternative Minimum Tax runs alongside the regular tax system and adds back certain preference items to make sure higher earners pay a floor. For most employees, an ISO exercise is the first time AMT actually bites.
The spread between exercise price and fair market value on an ISO exercise counts as income for AMT purposes even though the regular system ignores it. You calculate tax under both systems and pay whichever is higher. For 2026, the AMT exemption is $90,100 for single filers and $140,200 for married couples filing jointly, phasing out at 25 cents per dollar once alternative minimum taxable income exceeds $500,000 (single) or $1,000,000 (joint). A large ISO exercise around an IPO can burn through both the exemption and the phaseout.
If you pay AMT, you generate a minimum tax credit that carries forward indefinitely and can offset regular tax in later years. That credit is claimed on Form 8801, and it makes AMT more of a timing issue than a permanent surcharge in most cases.
The real danger is what practitioners call phantom income. You exercise ISOs when the stock is at $50, creating a large AMT adjustment. The AMT bill comes due the following April. If the price has dropped to $20 by then, you owe tax on a paper gain you cannot realize without selling at a loss, and if the shares are still locked up you cannot sell at all. Employees hit by this during the dot-com bust ended up bankrupt. It is the main reason many advisors suggest exercising ISOs in stages rather than all at once immediately before an IPO.
Why Your Employer’s Withholding Will Not Cover the Bill
This is where most people get blindsided. When RSUs vest or NSOs are exercised, your employer withholds federal income tax at the flat supplemental wage rate of 22% on amounts up to $1 million in a calendar year. Above $1 million, the rate is 37%.
If your total income lands you in the 37% bracket, that 22% flat rate on the first $1 million of equity income leaves a 15-percentage-point gap. On $500,000 of RSU income, that is roughly $75,000 in federal tax you still owe when you file, before any state shortfall or the 3.8% Net Investment Income Tax.
State withholding often has a similar gap. Several states use a flat supplemental rate that sits well below their top marginal rate. Setting aside 40 to 50 percent of every equity vesting in a liquid account until you have confirmed your actual liability is the simplest defense.
Estimated Tax Payments and Safe Harbors
A big IPO year can leave you owing six figures the withholding did not cover. The IRS expects tax to be paid as income is earned, either through withholding or quarterly estimated payments. Miss that, and an underpayment penalty stacks on top of the tax.
You avoid the penalty by paying either 90% of your current-year liability or 100% of your prior-year liability, whichever is smaller. If your prior-year adjusted gross income was above $150,000 ($75,000 if married filing separately), the prior-year figure rises to 110%. For someone stepping from a normal salary year into a year with millions of equity income, the prior-year safe harbor is almost always the easier target, but you still have to actually pay enough to hit it.
Estimated payments are due April 15, June 15, September 15, and January 15 of the following year. If the IPO happens mid-year and your income is concentrated in one quarter, the annualized installment method on Form 2210 can reduce or eliminate the penalty for earlier quarters where you genuinely did not owe much.
Selling Shares After the Lock-Up
Once the lock-up expires, the analysis shifts from income recognition to capital gains and losses. Every sale of publicly traded stock gets reported on Form 8949 with totals carried to Schedule D.
Getting Your Cost Basis Right
Basis depends on how the shares were acquired:
- NSO shares: exercise price plus the bargain element already reported as W-2 income.
- RSU shares: fair market value on the vesting date, because that entire amount was already taxed as ordinary income.
- ISO shares in a qualifying disposition: the exercise price you paid.
- ISO shares in a disqualifying disposition: exercise price plus the portion of the spread taxed as ordinary income.
- 83(b) stock: the fair market value at grant (which you already reported as income) plus anything you paid.
Your brokerage will report cost basis on Form 1099-B, but those figures are frequently wrong for equity compensation, especially ISOs and shares acquired through early exercise. Check every 1099-B against your own records before filing.
Holding Periods and Rates
The holding period starts the day after the income recognition event: the day after vesting for RSUs, the day after exercise for options, the day after the grant for 83(b) stock. Hold for more than one year and gains qualify for long-term capital gains rates. For 2026, long-term rates are 0%, 15%, or 20%, with the 20% rate kicking in above $545,500 of taxable income for single filers and $613,700 for married couples filing jointly. Short-term gains are taxed as ordinary income at rates up to 37%.
The Net Investment Income Tax
High earners owe an additional 3.8% on capital gains. The NIIT applies to the lesser of net investment income or the amount by which modified adjusted gross income exceeds $200,000 (single), $250,000 (joint), or $125,000 (married filing separately). Those thresholds are not indexed to inflation. The effective top federal rate on long-term IPO gains is therefore 23.8%, not 20%. On short-term gains, it climbs to 40.8%.
Watch for Wash Sales
The wash sale rule disallows a loss if you buy substantially identical stock within 30 days before or after the sale. This trips people up around IPOs. You sell a block at a loss, and days later new RSUs vest. That vesting counts as an acquisition, the wash sale rule kicks in, and the disallowed loss gets added to the basis of the newly acquired shares. The tax benefit is deferred rather than lost, but it is not what you expected.
Two Tax Breaks Worth Knowing About: 83(b) and QSBS
The Section 83(b) Election
An 83(b) election lets you pay ordinary income tax on restricted stock at the time you receive it rather than at vesting. For founders and very early employees receiving Restricted Stock Awards when the company is worth almost nothing, this is one of the most valuable moves available. You pay ordinary income tax on the difference between the fair market value at grant and what you paid, which at an early-stage company might be pennies per share. Everything above that qualifies for long-term capital gains if you hold more than a year after the election. The election also starts your holding period immediately, which matters for both capital gains and QSBS eligibility.
The window is 30 days from receiving the stock. Miss it and you cannot go back. The IRS provides Form 15620 for the filing.
The downside is real. If you leave before the stock vests and forfeit the shares, the IRS does not refund the tax you paid. You can claim a capital loss, but only up to what you paid for the stock, not the tax on the spread.
Qualified Small Business Stock Under Section 1202
The QSBS exclusion is the single largest tax benefit available to founders and early investors at an IPO. It can exclude up to 100% of gain on qualifying stock, with a per-issuer cap of the greater of $10 million or ten times your adjusted basis.
To qualify for the full 100% exclusion:
- The stock must have been acquired after September 27, 2010. Earlier acquisitions may still qualify at 50% or 75% depending on the date.
- You must hold the stock for more than five years.
- The issuer must be a domestic C-corporation whose aggregate gross assets did not exceed $75 million at the time of issuance or immediately after.
- The corporation must use at least 80% of its assets in the active conduct of a qualified trade or business. Financial services, hospitality, and professional services firms are among the excluded industries.
The $75 million threshold is measured at the time the stock is issued, not when it is sold. Shares acquired before the IPO can qualify because the company was small enough when the stock was originally issued. Shares purchased on the open market after the IPO almost never qualify because the company’s assets will have grown past the threshold with IPO proceeds. Sales of QSBS get reported on Form 8949 and Schedule D.
For a founder who made an 83(b) election on stock received when the company was worth almost nothing, the combination is powerful. The 83(b) started the five-year clock early, and QSBS can eliminate federal tax on millions in gain.
State Taxes and Multi-State Sourcing
Federal is only part of the picture. If you worked in more than one state during the period your equity was vesting, each state may claim a slice of the income. Most states use a time-based allocation: the state’s share equals days worked in that state divided by total days worked everywhere during the vesting period. An employee who spent two of four vesting years in one state and then moved will owe tax in both states on RSU income that vests at the IPO. That can mean filing returns in multiple states and pulling work-location records going back years.
International adds another layer. U.S. citizens and green card holders owe federal tax on worldwide income no matter where they live, and all equity income still gets reported on Form 1040. The Foreign Tax Credit on Form 1116 can offset U.S. tax by foreign income tax paid, but only up to the U.S. tax attributable to foreign-source income. Treaties can shift which country has the primary taxing right, and the analysis is fact-specific enough to be worth professional help.
Donating Appreciated Shares Instead of Selling Them
If charitable giving is already in your plans, donating appreciated stock directly to a qualified charity, rather than selling and donating cash, avoids capital gains tax on the appreciation and produces a deduction for the full fair market value. For low-basis IPO shares, it is one of the most tax-efficient tools available.
A donor-advised fund is the simplest vehicle. You contribute stock, take an immediate deduction of up to 30% of your adjusted gross income for appreciated stock contributions, and recommend grants to charities over time. Excess deductions carry forward for up to five years. A charitable remainder trust does something different: you transfer appreciated stock into an irrevocable trust that sells without paying capital gains, invests the proceeds, and pays you an annual income stream (typically 5 to 8% of trust value) for a term or your lifetime, with an upfront deduction based on the present value of what will eventually go to charity.
Timing matters. Contribute the shares before selling. Contribute after selling and you have already triggered the tax, and only a cash donation is left to deduct.