IPO 101

What you need to know about IPO taxation

The Terms

Holdings

Tax terms

Taxation

Calculate your taxes HERE.

You may be subject to both federal and state income taxes at various events. Generally, both systems are progressive in that as your income rises, you pay a higher percent tax (your “bracket”) on your marginal income. State rules are very state-specific - as a plurality of people going through an IPO are in California, I only cite that state's tax code.

Stock

You can read about the brackets and mechanics here. The short story is that you pay taxes when you sell on the capital gains (difference between current price and issued price) on stock are taxed as follows:

Short term

Long term

Qualified Small Business Stock (QSBS)

If you were rather early into the company, you may be eligible for no federal capital gains (you’ll still owe state if relevant!) You should know if your stock is QSBS eligible - this is out of scope of this document.

California State

California does not treat capital gains differently from income. So capital gains are just added to your income and taxed at the appropriate marginal rate.

RSU

When an RSU share is released, the following occurs:

Generally speaking, the company withholds RSUs upon release to uses the withheld value to pay your taxes (under standard withholding rules, which might differ from the actual taxes you owe on release).

California State

Anything federally taxable is state taxable.

Note that if you have changed states since receiving your RSUs, two states may have rights to your income:

See California’s guide.

NQSO

When you exercise an NQSO:

Generally speaking, your company will require you to pay both the strike and the tax withholding for the increase of income.

NSQO ordinary income has similar tax jurisdiction rules as RSUs.

ISO

ISOs are similar to NQSOs. However, if you hold the stock at least two years after exercising, you receive favorable tax treatment (deferal of paying taxes and move income being long-term capital gain):

WARNING: the Alternative Minimum Tax treats ISOs similarly to NQSOs (ordinary income increases), so tread carefully — exercising may increase your taxes. I recommend reading this guide.

Taxation Gotchas