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2026 tax year · equity compensation

Employee Stock Purchase Plan (Section 423 Qualified) tax

An employee stock purchase plan gives you a discount, and how long you hold decides whether that discount is taxed as ordinary income or as capital gain. Two holding periods have to be cleared, not one.

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Two taxable events, not one Equity compensation creates two taxable events: (1) ordinary income when shares vest or options are exercised, (2) capital gain/loss when shares are sold. Misunderstanding this two-layer structure is the most expensive equity tax mistake.

Two holding periods, both of which have to clear

A Section 423 plan lets you buy at a discount of up to 15%, with an annual purchase limit of $25,000. Whether the discount is taxed as ordinary income or as capital gain depends on clearing BOTH periods: more than more than 2 years from the offering date AND more than more than 1 year from the purchase date. Missing either makes it a disqualifying disposition.

Section 423 qualified ESPP shares: NO FICA on either qualifying or disqualifying dispositions. Non-qualified ESPPs ARE subject to FICA at purchase.

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The other equity instruments

RSU tax The equity mistake that costs the most: under-withholding at vest. ISO tax The equity mistake that costs the most: AMT on an exercise you never sold. NSO tax The equity mistake that costs the most: tax due on exercise with no cash to pay it. QSBS tax The equity mistake that costs the most: assuming five years when the rules just changed. Phantom stock & SARs tax The equity mistake that costs the most: expecting capital-gains treatment on a cash bonus.

Equity is two taxable events, not one

Vesting or exercising is ordinary income; selling later is a capital gain or loss. The costliest equity mistakes come from treating that two-layer structure as one: underestimating the vesting-day bill, or missing a holding period that would have turned ordinary income into a lower capital-gains rate. Work out both layers before the vest, not at filing.

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