Equity & Comp

Equity compensation is one of the most tax-complex areas of high-income finance — and one where the decisions made at grant, vesting, and exercise have the most dramatic impact on after-tax outcomes. The difference between optimal and suboptimal handling of a meaningful equity award can easily reach hundreds of thousands of dollars in taxes on the same economic outcome. Understanding the mechanics of each equity type before making decisions is worth significant attention.

Restricted Stock Units (RSUs) are the most common form of equity compensation at public companies. At vesting, the fair market value of vested shares is taxed as ordinary income — included in W-2 wages, subject to income tax and payroll taxes. Many companies withhold shares to cover the tax at vesting, but the statutory withholding rate (22% for supplemental wages below $1 million, 37% above) may be lower than your actual marginal rate, creating an underpayment that requires a quarterly estimated tax payment to avoid penalties. The decision of when to sell vested shares is a separate, post-vesting decision involving capital gains timing.

Incentive Stock Options (ISOs) from private companies or startups require the most careful tax planning. Exercise of ISOs is not a regular income event — but the spread (fair market value minus exercise price) is an Alternative Minimum Tax (AMT) preference item. In a year when the stock has significant value, exercising a large ISO grant can trigger substantial AMT liability even before the shares are sold. The 83(b) election — electing to be taxed at grant on the then-current value of unvested restricted stock — is another decision with major tax implications that must be made within 30 days of the award.

The tax decisions around equity compensation are among the most consequential that high earners face and among those most likely to benefit from professional guidance. For the broader tax context, capital gains covers how long-term treatment applies to equity after vesting, and income tax provides the rate structure within which all equity income is taxed. The Tax & Wealth pillar covers equity compensation as part of the complete high-income tax picture.