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2026 tax year · equity compensation

Non-Qualified Stock Options tax

Non-qualified options are taxed as ordinary income on the spread the day you exercise, whether or not you sell a single share. Exercise and hold, and you owe cash tax on a gain that exists only on paper.

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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.

Tax the day you exercise, cash or no cash

The spread, FMV at exercise minus strike price, is ordinary income the moment you exercise. For an employee it runs through payroll and FICA applies. For a contractor it lands on a 1099-NEC and is subject to self-employment tax, with nothing withheld: Must pay via quarterly estimated taxes.

Tax owed at exercise even if shares not sold. Cashless same-day sale covers obligation but triggers immediate sale.

Compare the instruments

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. ESPP tax The equity mistake that costs the most: selling one day too early. 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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