50+ Tax Strategies
Tax strategies to consider when optimizing your stock comp holdings
Last updated
Tax strategies to consider when optimizing your stock comp holdings
Last updated
Like so many aspects of stock-based compensation planning, tax optimization and strategy development is complex. More than 50 strategies (not to mention combinations of strategies) exist, each with their own use cases and pros/cons. Ideally, we'd provide custom tailored advice to each reader. But given that isn't remotely possible (we don't know your holdings, needs, resources, company, etc.), we've provided the next best thing: a proverbial "menu" of tax strategies, categorized by stock-comp type, with each specific strategy structured as a "one-page tear-sheet" detailing (1) strategy overview, (2) tax details deep-dive, (3) key benefits and considerations/flags, (4) scenarios when it may make sense to to consider (and when not), and (5) an example.
And as always, if you'd like professional help and expertise in selecting, building, and optimizing your plan, get in touch with us (it's what we specialize in!)
Hold Stock for at Least One Year (Long-Term Capital Gains Treatment). Holding stock for at least one year before selling provides preferential long-term capital gains tax treatment.
Manage Your Capital Gains Tax Bracket. Strategically timing capital gains realizations can optimize long-term capital gains taxation by managing applicable brackets and shifting gains to years with lower marginal rates.
Tax Loss Harvesting. Tax loss harvesting can help you reduce your capital gains tax bill.
Accelerated Tax Loss Harvesting (Long/Short Portfolio). A long-short equity portfolio generates more tax loss harvesting opportunities through the use of short positions.
Tax Lot Management. Selecting specific tax lot(s) when selling company stock gives you greater control of your tax bill.
Relocate to a Lower Taxation State. Relocating to a state with no/low income tax rates allows you to avoid high state tax rates on stock sales and stock comp income.
Relocation to a Higher Taxation State. If you're relocating to a state with higher taxes, consider selling/realizing gains on appreciated assets before you move.
Hedge Your Stock. Hedge your stock using derivatives to (quite literally) buy yourself time.
Opportunity Zones (Defer Capital Gains Taxes). Reinvesting realized capital gains into a qualified opportunity zone fund within 180 days has multiple tax benefits.
ING Trusts (Potentially Avoid State Taxes). An Incomplete Non-Grantor Trust is a specialized trust that may allow you to avoid state taxation on Capital Gains.
Exchange Funds (Diversify + Defer Capital Gains Taxes). Exchange funds allow diversifying concentrated stock positions into a portfolio of assets tax-free.
Exercise NSOs Earlier. Exercising NSOs sooner rather than later to shift taxation from (higher) income taxes to (lower) long-term capital gains tax rates.
File an 83(b) election. File an 83(b) Election to shift taxes from income to capital gains.
Pair NSO Exercises With ISO Exercises. Pairing NSO exercises with ISO exercises can help minimize (or eliminate) AMT tax exposure.
Understanding/Correcting Cost Basis Post-IPO for NSOs. If you exercised NSOs pre-IPO and your company eventually IPOs, the cost basis your broker lists for your NSOs will very likely be wrong (and needs to be corrected on your taxes).
Meet ISO Qualifying Disposition Requirements (Optimal Tax-Treatment). To exclude up to 100% of capital gains on qualified small business stock from income, hold the shares for 5+ years from issuance while meeting QSBS eligibility requirements.
Exercise ISOs Earlier. Exercise ISOs sooner than later to reduce/eliminate AMT.
Exercise ISOs up to (But Not Above) the AMT Tax Limit. Exercising ISOs up to your AMT limit allows you to optimize for ISOs preferential tax treatment without triggering/having to pay AMT.
Sell ISO-Acquired Stock To Recoup AMT Tax Credit. For tech professionals, exercising ISOs is what most frequently creates an AMT tax bill. Selling those same ISO-acquired shares helps to recoup your AMT credit.
Pair Capital Gains with AMT Capital Losses To Recoup AMT Tax Credit. If selling your ISOs results in an AMT capital loss, selling other assets for a capital gain can help recoup your AMT tax credit.
Exercise ISOs Within 90 Days After You Leave A Company. To maintain preferential ISO tax treatment, departing employees should exercise their incentive stock options within 90 days or else they will convert to less favorable NSOs.
Exercise ISOs Between January and April. If your company is publicly traded, exercising ISOs early in the year will provide you with the most flexibility to optimize for AMT.
Multi-Year AMT Spread Riding. AMT spread riding is a multi-year strategy to exercise a large number of ISOs with minimal AMT impact.
Leave an Employer in 4Q To Optimize AMT. If you leave an employer in 4Q, you'll likely have two tax years across which you can optimize your ISO exercises and AMT bill (versus just one).
Sell ISOs in the Same Tax Year To Avoid AMT. Selling ISO-acquired stock in the same tax year as you exercised avoids AMT. This can be a smart tax strategy in a few situations.
Maximize Income Tax Deductions. Maximize income tax deductions to reduce taxable income.
Manage Your Income Tax Bracket. Strategically time income and maximize deductions to manage tax brackets and minimize overall liability.
Stack Income Tax Deductions. Stacking flexible itemized deductions into high-income years maximizes tax savings.
Donor Advised Funds (3x Benefits). Donor Advised Funds are personal charitable investment vehicles that can provide you with triple tax benefits.
Use a Deferred Compensation Plan To Push Income to Future Years. If offered by your employer, a deferred compensation plan allows you to (quite literally) defer income to future year(s); ideally to years where your income tax rate will be lower.
Understanding and Optimizing for State Taxation. State taxation rules can differ substantially in some areas. Make sure you understand your state's specific tax laws for the strategies you implement.
Maximize Employer Paid Social Security. Exercising NSOs (from a former company) when you're self-employed can reduce the Social Security taxes you have to pay by as much as 50%
Uncommon Ways To Reduce Your Taxable Income. A handful of uncommon (and typically complex) strategies may help you reduce earned income in select situations.
Gift Stock to Individuals in a Lower Tax Bracket. Recipients of gifted stock receive the giver's holding period and cost basis. If the recipient's long-term-capital-gains tax bracket is lower, it will yield tax savings.
Hold Stock Until Death (Step-Up in Basis). Holding highly appreciated assets, like stock, until death allows your heirs to inherit the assets with a stepped-up cost basis equal to the fair market value (eliminating capital gains tax).
Utilization of a Charitable Trust (CRUT/CRAT). Charitable trusts may allow individuals to sell appreciated assets tax-deferred (to diversify), receive funds over time, and/or take a large up-front deduction.
Utilization of a Grantor Trust (GRAT). Grantor retained annuity trusts (GRATs) are estate planning tools that can shift the appreciation (post-gift) of assets to beneficiaries tax-free.
Transfer Assets to Spouse, if an Unexpected Death is Anticipated to Receive Full Step Up in Basis. Depending on your state and circumstances, transferring appreciated assets to a spouse expected to pass away may enable a full step-up in basis (upon death), eliminating capital gains tax.
Meet QSBS Requirements (Optimal Tax Treatment). The QSBS tax exemption can allow you to exclude 100% of capital gains (up to $10 million; perhaps more). But you must meet a large number or criteria.
Exercise ISOs/NSOs Prior to a QSBS Disqualifying Event. If you own options in a company about to disqualify for QSBS, exercising your options before this event allows the purchased shares to qualify for preferential QSBS Treatment.
QSBS "Stacking" (Via Gifts and Trusts). Gifting QSBS stock and/or utilizing irrevocable trusts can allow you to multiply the QSBS tax exclusion well beyond $10 million.
QSBS "Packing" (Invest with Property). Investing more than $1mm in a QSBS eligible company enables a QSBS exclusion above $10mm via the 10x rule. Property can also be invested (vs. cash), which increases strategic options.
QSBS 1045 Exchange. If your QSBS is sold before meeting the 5-year holding period, you can consider rolling the gains into a new QSBS investment using a 1045 exchange to maintain QSBS eligibility.
(Typically) Sell ESPP Shares Upon Purchase. In the majority of ESPP shares purchases, there are minimal or no tax benefits to be gained by holding shares, and selling the shares immediately is likely the best path to pursue.
Hold ESPP Shares for a Qualifying Disposition. If you have a qualified ESPP program that offers a lookback provision and the shares increased during the offering period, holding for a qualifying disposition can provide preferential tax treatment.
Exercise 100% of RSAs via 83(b) When Granted. In the vast majority of circumstances with RSAs, exercising 100% of your grant via 83(b) will be the optimal risk/reward decision.
Optimizing for RSU Underwithholding. The taxes withheld when your RSUs vest are almost always less than what you will actually owe. You will owe the difference come tax time.
Sell 100% of RSU Shares When They Vest. There is no tax benefit to holding RSUs after they vest.
Double-Trigger RSU Liquidity Year Planning. If you have double-trigger RSUs, by definition they will vest when both criteria are met. Many times this results in a large amount of shares vesting at one time, creating a spike in income.
Design and Implement a 10b5-1 Selling Plan. 10b5-1 selling plans allow employees to schedule future stock sales based on customized criteria, enabling trades even during blackout periods.
Consider All Liquidity Event Outcomes When Creating Your Plan. Evaluate the tax implications of startup equity under different liquidity events to optimize your liability and types of gains or losses based on the exit.
Tax laws and rates are currently scheduled to change in 2026. These changes could impact many of the above mentioned strategies. As with any tax items, it's also unclear if things will stay as they currently are, or change.
The potential for changes in the tax code and rates should be considered as part of your strategy!