Equity compensation ties part of your pay to your employer's success, and for many executives and professionals it becomes one of the largest assets the family owns. It also brings decisions a salary never does: when to exercise, when to sell, how much tax to set aside, and how much of your net worth should ride on one company.

The rules are technical and the deadlines are short. This overview covers the most common types of awards, how each is generally taxed, and the planning questions worth raising before a deadline makes the decision for you.

The tax discussion describes general federal rules. State rules can differ: New Jersey, for example, taxes short-term and long-term capital gains the same way.

Why Equity Compensation Calls for Its Own Plan

Awards that look alike can produce very different tax results. The outcome depends on what your plan documents say about vesting, exercise, settlement, liquidity events, and sale restrictions. A stock-plan website is a useful summary, but the grant agreement and plan document control.

Two questions drive most of the planning: when is the value taxed, and as what? Compensation income is generally taxed at ordinary rates. For employees, it is generally reported on Form W-2 and, in most cases, subject to payroll taxes and withholding. Gain or loss after you own the shares is generally capital, and long-term treatment generally requires holding them for more than one year.

A later drop in the share price does not undo compensation income you have already recognized. Selling at a loss creates a capital loss, but only $3,000 of net capital loss can offset other income each year, with the remainder carried forward. A tax bill can therefore outlast the value of the shares.

Taxes are only part of the picture. When your paycheck and your savings depend on the same company, a setback at work can hit both at once. Good planning coordinates tax timing with cash flow, concentration risk, and goals such as retirement, education, and giving.

Common mistakes include:

Treating the shares withheld at vesting or exercise as the full tax bill
Ignoring the alternative minimum tax (AMT) until filing season
Assuming private-company shares can be sold whenever tax comes due
Missing the deadline to exercise incentive stock options after leaving a company
Assuming restricted stock units are eligible for an 83(b) election
Letting the wish to avoid tax override diversification, liquidity, and risk management

Common Types of Equity Compensation

Each type of award follows its own tax and planning rules. The five below are the ones most people encounter.

Award	What you receive	When compensation income generally arises	Main planning issue
Incentive stock options (ISOs)	The right to buy shares at a fixed price; employees only	Not at exercise for regular tax; it depends on when the shares are sold	AMT exposure and two holding periods
Nonqualified stock options (NQSOs)	The right to buy shares at a fixed price; employees, directors, and consultants	At exercise, on the spread	Paying the exercise cost and the tax
Restricted stock	Actual shares at grant, subject to vesting	At vesting, or at grant with an 83(b) election	The 30-day election deadline
Restricted stock units (RSUs)	A promise to deliver shares or cash after vesting	At settlement, when shares or cash are delivered	Withholding that falls short; growing concentration
Performance stock units (PSUs)	RSU-like awards where the number of shares depends on performance	At settlement	A payout that may land well above or below target

Employers may also offer employee stock purchase plans (ESPPs), stock appreciation rights (SARs), and profits interests.

Stock Options

A stock option gives you the right, but not the obligation, to buy company stock at a fixed price, called the exercise or strike price. You do not own shares until you exercise. The option gains value as the stock rises above the strike price, and your plan documents set the vesting schedule, expiration date, and what happens if you leave.

Incentive Stock Options (ISOs)

ISOs can receive favorable tax treatment if you meet two holding periods. Grant and vesting are generally not taxable, and exercise generally does not create ordinary income under the regular tax system.

If you sell the shares more than two years after the grant date and more than one year after exercise, the gain is generally taxed as long-term capital gain. If you miss either test, some or all of the gain is taxed as compensation income.

The catch is the alternative minimum tax, a parallel calculation that runs alongside the regular tax system. The spread at exercise, known as the bargain element, generally counts as income for AMT purposes. Exercise 10,000 options at $10 when the stock is worth $15 and hold the shares past year-end, and $50,000 is added to your AMT income, even though you have sold nothing. AMT paid this way may create a credit against future tax, but recovering it can take time.

AMT deserves a fresh look this year. Starting in 2026, the AMT exemption begins to phase out at $500,000 of alternative minimum taxable income for single filers and $1,000,000 for joint filers, and it phases out twice as fast as before. As a result, more people who exercise ISOs may owe AMT than in recent years.

A few other rules matter:

ISOs generally must be exercised within 10 years of grant.
After employment ends, you generally have three months to exercise and keep ISO treatment. Your award may set a different contractual deadline, so confirm both.
Only $100,000 of options, measured by grant-date stock value, can first become exercisable as ISOs in a calendar year. The excess is treated as NQSOs.

Common ways to manage AMT include exercising smaller amounts over several years and exercising early in the calendar year, which leaves time to evaluate a same-year sale. A tax projection before you exercise is worth the effort, especially when the spread is large.

Nonqualified Stock Options (NQSOs)

NQSOs are taxed at exercise. The spread between the stock's value and the exercise price is compensation income. For employees, it is reported on Form W-2 and subject to withholding.

Suppose your exercise price is $10 and the stock is worth $15 when you exercise. You have $5 per share of ordinary income. If you later sell at $25, the additional $10 per share is capital gain, long-term if you held the shares more than one year after exercise.

Withholding and your actual tax liability do not always match. The amount withheld at exercise may be less than what you ultimately owe, which can mean a balance due at filing time.

Depending on what your plan allows, you generally have three ways to exercise:

Exercise and sell everything. This creates cash and reduces concentration, but gives up future upside.
Exercise and sell enough to cover the tax. You keep some shares without needing outside cash.
Exercise with outside cash. You keep more shares, but you need liquidity and take on more company-stock risk.

The order of your decisions matters when you hold both kinds of options. Someone who exercises and immediately sells ISOs, while exercising and holding NQSOs, gives up the ISOs' potential long-term treatment. They still pay ordinary income tax on the NQSO spread, and they remain concentrated.

Restricted Stock and the 83(b) Election

Restricted stock is actual stock, issued to you at grant, that you can lose if you leave before it vests. It is not the same as a restricted stock unit. Without an election, you generally recognize compensation income at vesting, equal to the shares' fair market value at that time less anything you paid for them.

An 83(b) election lets you pay tax up front instead, based on the value when you receive the shares. Growth after that date may then qualify as capital gain. The election generally must be filed within 30 days after the shares are transferred to you, which is not always the grant date and leaves little room for delay.

The value at grant drives the decision. If shares are granted at $0.10 and vest at $10, the election means $0.10 per share is taxed as compensation instead of $10. If the shares are already worth $5 at grant, the election requires a real cash outlay on shares you might never keep.

An 83(b) election tends to help most when:

The current value of the shares is low
You expect significant growth
You are confident the shares will vest
You have cash available to pay the tax up front

The risk is that the tax you pay is generally not recovered if the shares are later forfeited. If the shares fall in value, you will have paid tax on a higher number than you ended up with.

RSUs and PSUs

Restricted Stock Units (RSUs)

An RSU is a promise to deliver shares or cash once vesting conditions are met. No stock changes hands at grant, so an 83(b) election is not available.

The taxable event generally occurs at settlement, when the shares or cash are delivered. The value at that point is compensation income, reported on Form W-2 and subject to withholding. Your cost basis generally equals that value, and the holding period for capital gains starts at delivery. Social Security and Medicare taxes follow separate timing rules and can apply at vesting, even if the shares are delivered later.

This clears up a common misconception: that you must hold RSU shares for a year after vesting to get favorable tax treatment. The tax on the vested value is owed either way. Selling soon after delivery generally creates little or no additional gain, and the one-year clock applies only to growth after that date.

A useful test is to treat vested RSUs like a cash bonus. If your employer had paid you cash, would you use it to buy that much company stock today? If not, continuing to hold the shares deserves the same scrutiny.

Private companies often use double-trigger RSUs, which require both time-based vesting and a liquidity event such as an IPO or acquisition. The design is intended to keep a tax bill from arriving before there is a market for the shares, although a lock-up after an IPO can still delay a sale. RSUs granted in 2025 might finish time-based vesting in 2028, with no shares delivered and no tax until an IPO in 2030.

Some private-company employees may also qualify for a Section 83(i) election, which can defer income tax for up to five years. Eligibility is narrow.

Performance Stock Units (PSUs)

PSUs work like RSUs, except the number of shares you earn depends on performance. Common measures include revenue, profitability, share price, and results relative to peer companies.

Awards are usually granted at a target number of shares, and the actual payout may range from zero to 200% or more of target. Projections should cover a low, target, and high outcome, because the range affects your tax bill and your concentration. Taxation generally follows the RSU framework.

Plans also differ in how they treat PSUs in a merger or acquisition. Some accelerate vesting at target, some use actual performance to date, and some convert the award to time-based RSUs or cash.

Private Company Equity

Private-company equity is harder to value, harder to sell, and more dependent on company-specific rules than public stock. In some cases, tax comes due before there is any practical way to turn shares into cash.

Tender offers and secondary sales can provide liquidity before an IPO. These windows are usually limited, controlled by the company, and subject to caps and eligibility rules. The question is rarely just "sell or hold." It is how much of your net worth should stay tied to one private company.

An IPO does not mean you can sell right away. Employees are often subject to a lock-up period, most commonly 180 days, and the share price can move a great deal before it ends. After the lock-up, company trading windows, blackout periods, and insider trading rules still apply.

A Rule 10b5-1 plan sets a schedule of trades in advance. If it is adopted in good faith while you are not aware of material nonpublic information, and it meets the rule's other conditions, including a cooling-off period before the first trade, it can provide an affirmative defense to insider trading claims.

Until you know when you can sell, how much you can sell, and which taxes and exercise costs come first, keep near-term spending commitments separate from expected proceeds.

Reducing Concentration While Managing Capital Gains

The more your shares have appreciated, the larger the tax on a sale, and that friction can make it tempting to put off diversifying. The tax on a sale is a known cost, while the risk in a concentrated position is harder to measure. Both belong in the decision.

The simpler tools come first: spreading sales across tax years, harvesting losses elsewhere in the portfolio, choosing which share lots to sell, and donating appreciated shares to charity.

For larger positions, more specialized strategies may be worth evaluating:

Exchange funds. You contribute appreciated stock to a pooled fund and receive an interest in a diversified portfolio, deferring the gain. These are typically limited to qualified purchasers, carry fees, and commonly require a seven-year holding period.
Section 351 exchanges. You contribute a portfolio to a newly formed ETF in exchange for its shares. The portfolio must already meet diversification tests, so one stock alone will not qualify.
Qualified Opportunity Funds. Eligible gain reinvested within 180 days of a sale may be deferred. Timing matters this year: investments made on or after January 1, 2027 fall under revised rules, while gain already deferred in an existing fund is generally recognized on December 31, 2026. These investments are illiquid, concentrated, and carry significant risk.
Leveraged long-short strategies. Borrowing against a portfolio to add long and short positions can create more losses to harvest. This defers tax rather than eliminating it, and adds cost, leverage, and complexity.
Variable prepaid forward contracts. You receive cash today in exchange for delivering a variable number of shares later. The structure may defer gain, but it caps your upside and requires careful legal review.
Power of appointment trusts. This estate planning technique seeks a step-up in cost basis. It depends on family circumstances and state law, and needs an attorney's guidance.

None of these suits everyone. The right mix depends on your tax picture, company restrictions, liquidity needs, and long-term goals.

Plan Before the Deadline Arrives

Many equity compensation decisions are time-sensitive, and some cannot be reversed. A missed 83(b) election, an ISO exercise that triggers unplanned AMT, or a sale made in the wrong order can be costly and hard to correct.

Four questions are worth answering before your next vesting date, exercise, or liquidity event:

What awards do I hold, and what do the plan documents say about vesting, expiration, and leaving the company?
What is my total projected tax, not just the amount withheld?
Where will the cash come from for exercise costs and taxes?
How much of my net worth is in company stock, and what is my rule for selling or holding?

When you do sell, compare the cost basis on your brokerage statement with your stock-plan records. Brokerage forms often leave out income already taxed as compensation. Without an adjustment on your return, the same income can be taxed twice.

At Beacon Hill Private Wealth, we help clients coordinate equity compensation decisions with their broader financial plan, investment strategy, and tax considerations, in collaboration with their tax and legal professionals. If you would like to talk through your situation, we invite you to request an introductory conversation.

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Beacon Hill Private Wealth is an independent, fee-only fiduciary investment advisory firm. Founder Tom Geoghegan provides coordinated wealth management that integrates evidence-based investing with tax-aware financial planning, helping professionals and families navigate complex financial decisions over time.

This article is for informational and educational purposes only and should not be construed as investment, tax, legal, or accounting advice. Any decisions regarding equity compensation, stock options, RSUs, taxes, or estate planning should be evaluated based on your individual circumstances and in consultation with your tax and legal advisors. Information is as of July 2026, and tax laws and regulations are subject to change. Examples are hypothetical and for illustration only. Investing involves risk, including the possible loss of principal, and no strategy can guarantee returns or eliminate risk. Diversification does not guarantee a profit or protect against a loss. The strategies described are not suitable for every investor, may be available only to investors who meet eligibility requirements, and may be offered only through third parties. Mentioning a strategy is not a recommendation. Beacon Hill Private Wealth LLC is a Registered Investment Adviser. Registration as an Adviser does not imply a certain level of skill or training.