Understanding Your Company Stock Grants

A Guide to Types, Taxes, and Long-Term Planning

If your employer offers stock grants as part of your compensation, you may already know they can be valuable. What is less obvious is how they work, when taxes are owed, and what decisions you need to make along the way. Getting those details wrong can lead to unexpected tax bills, missed opportunities, or a portfolio that is far more dependent on your employer than you realize.

How Each Grant Type Is Taxed

Equity compensation comes in several forms, and each one has its own rules for when you receive value, when taxes are due, and how much you owe. In most cases, when a taxable event occurs, the income shows up on your W-2, just like your salary. That means it is subject to federal and state income taxes, as well as Social Security and Medicare taxes. It also gets added to your total income for the year, which can affect other parts of your tax picture, including eligibility for certain deductions or credits. The key differences between grant types come down to timing and tax rates.1

Non-Qualified Stock Options (NSOs) give you the right to buy company stock at a fixed price, called the strike price, at some point in the future. The strike price is locked in on the day the options are granted, regardless of what happens to the stock afterward. When you decide to exercise those options, meaning you use them to purchase shares, you owe taxes on the difference between what you pay and what the shares are worth on that day. That difference is treated as ordinary income, the same as wages. Options are often granted in larger quantities than other equity types, but their value depends entirely on the stock going up. If the stock price drops below your strike price, the options are considered underwater, meaning it would cost you more to buy the shares than they are currently worth. In that case, they have no practical value until the stock price recovers.1,3

Incentive Stock Options (ISOs) are a type of stock option with a more favorable tax structure. Unlike NSOs, you do not owe ordinary income tax when you exercise ISOs, as long as you follow the rules. To potentially qualify for favorable tax treatment, you need to hold the shares for at least two years from the date the options were granted and at least one year from the date you exercised them. If you meet both of those holding periods, any profit you make when you eventually sell the shares is taxed at long-term capital gains rates, which are generally lower than ordinary income tax rates. However, there is a catch: exercising ISOs can trigger something called the Alternative Minimum Tax, or AMT. The AMT is a parallel tax calculation the IRS runs alongside your regular tax, designed to ensure higher earners pay a minimum amount. When you exercise ISOs, the paper gain, meaning the difference between what you paid and what the shares are worth, gets factored into the AMT calculation, which can create a tax liability even if you have not sold a single share. There is also a limit on how much ISO value can become available to you in any one calendar year: no more than $100,000 in grant-date value can become exercisable for the first time in a given year. Any amount above that automatically converts to NSO treatment, meaning the favorable tax rules no longer apply to that portion.1,3,4

Restricted Stock Units (RSUs) are the most straightforward form of equity compensation and common at publicly traded companies today. You do not purchase anything. Instead, your employer promises to give you shares once you have stayed with the company long enough, or met certain conditions. When those shares are delivered, typically on a vesting date, their full value on that day is treated as ordinary income, and your employer withholds taxes just as they would from a paycheck. One thing to be aware of: the withholding amount is often not perfectly accurate. Employers use a standard rate set by the IRS, but that rate may be higher or lower than what you actually owe based on your total income for the year. It is worth checking whether you may end up with a tax bill or overpayment when you file, especially in years when a large number of shares vest.1,2

Restricted Stock is similar in concept to RSUs, but with one important difference: when you receive a restricted stock grant, actual shares are transferred into your name on the day of the grant. You own them immediately, even though they are subject to a vesting schedule and can be forfeited if you leave the company before vesting is complete. By default, the value of those shares is taxable as ordinary income when they vest, based on what the shares are worth at that time. However, you have the option to instead pay taxes at the grant date, based on the current value of the shares, through a planning strategy called the 83(b) election, which is covered later in this guide. Restricted stock grants are common at early-stage or private companies, where the stock price is low enough that taking ownership upfront and locking in that lower value for tax purposes can be advantageous.1

Performance Stock Units (PSUs) work similarly to RSUs, but with an added condition tied to company or individual performance. Rather than simply delivering shares on a set date, PSUs are designed so that the size of your payout depends on whether the company hits certain targets, such as revenue growth, earnings milestones, or stock price goals over a defined period. Most plans establish a target grant, which represents what you would receive if performance lands exactly where expected. From there, the actual payout can scale up or down. If the company significantly exceeds its targets, you may receive more shares than the target amount. If performance falls short, you may receive fewer, or in some cases none at all. PSUs are generally offered to executives and senior decision-makers whose roles have a direct impact on those outcomes. Once shares are actually delivered, the tax treatment is the same as for RSUs.1,2

Employee Stock Purchase Plans (ESPPs) are a benefit that lets you buy company stock at a discount, typically 10 to 15 percent below the market price, using money deducted from your paycheck over a set period. Many plans also include a lookback feature, which means the discount is calculated based on the lower of the stock price at the start or the end of that period. In practice, this can make the effective discount much larger than 15 percent if the stock has risen. How your gains are taxed depends on how long you hold the shares after purchasing them. If you hold for at least two years from the start of the offering period and at least one year from the purchase date, that is called a qualifying disposition. In that case, only the original discount you received is taxed as ordinary income, and any additional profit is taxed at the lower long-term capital gains rate. If you sell before meeting both of those holding periods, that is a disqualifying disposition. The spread between your purchase price and the fair market value of the shares on the day you bought them is taxed as ordinary income, and any further gain or loss above that is treated as a capital gain or loss. One important note: your employer does not withhold taxes at the time of purchase. That means you are responsible for planning ahead and setting aside money for what you may owe when you sell.1

Vesting Schedules and Blackout Dates

Receiving a stock grant does not mean you own those shares right away. Vesting is the process by which you gradually earn the right to the shares over time. Employers use vesting schedules to reward employees who stay with the company and to align incentives over the long term. There are two common structures.2

Cliff vesting means you receive nothing until a specific date, at which point the entire grant becomes yours all at once. A four-year cliff, for example, means you own zero shares at year one, two, or three, but receive 100 percent of the grant at year four. The upside is simplicity. The downside is that if you leave before that date for any reason, you walk away with nothing from that grant.2

Graded vesting delivers shares in increments over time, typically annually. A four-year graded schedule might release 25 percent of your grant each year. This approach reduces the all-or-nothing risk and gives you earlier access to some of your shares.2

On top of vesting schedules, most public companies also have blackout periods, which are windows of time, usually the two to four weeks leading up to a quarterly earnings announcement, when employees are not allowed to buy or sell company stock. Many public companies impose blackout periods under their insider-trading policies. If your shares happen to vest during a blackout window, the shares are technically yours, but you cannot sell them or take any action until the window ends. For employees who planned to sell shares immediately at vesting, perhaps to cover the taxes owed, a blackout period can delay that by several weeks and expose them to changes in the stock price in the meantime.5

The Concentration Problem

One of the most common and underappreciated risks of equity compensation is concentration. Grant by grant, year after year, shares can accumulate quietly until your employer's stock represents 30, 40, or even 50 percent or more of your total net worth, often without you noticing it happen.2

The problem runs deeper than simple investment risk. Most investments that go down do not also affect your paycheck. Company stock does. A poor earnings report, a leadership change, a competitor gaining ground, or a broader industry shift can all hurt the stock price and put your job at risk at the same time. Your income and your savings are both tied to the same outcome.2

It is natural to feel attached to company stock, especially when grants have grown significantly in value. But a large gain is not a reason to hold indefinitely. If anything, it is a reason to think more carefully about what portion of your wealth you are comfortable having exposed to a single company's performance. Reducing that concentration gradually over time is one of the most straightforward ways to protect what you have built.2

Advanced Planning Considerations

Once you understand the basics of how your grants work, there are a few additional strategies worth knowing about. These are more specialized, and whether they make sense depends on your specific situation. None should be acted on without a full review of your tax picture with your financial and tax professionals.

The 83(b) Election. Under normal IRS rules, when you receive restricted stock or exercise options before they have vested, you do not owe taxes until the shares actually vest. At that point, you owe taxes based on what the shares are worth on the vesting date, which could be much higher than when you first received them. The 83(b) election is a way to opt out of that default and instead pay taxes now, based on the current value of the shares. If the company grows and the stock rises significantly, this can produce meaningful tax savings: you pay ordinary income tax on a smaller number today, and any future appreciation is taxed at the lower long-term capital gains rate when you eventually sell. This strategy tends to make the most sense when the current value of the shares is low, such as early in a company's growth when the stock has not yet appreciated much. The risk is real: if you pay taxes upfront and the shares never vest because you leave the company, or the stock declines in value, those taxes are not refunded. The election does not apply to standard RSUs. The deadline to file is strict: you must notify the IRS within 30 days of receiving the shares.1,7

Net Unrealized Appreciation (NUA). If you have been contributing to a 401(k) and your plan holds company stock that has grown significantly in value, there is a tax strategy worth understanding called net unrealized appreciation, or NUA. Here is the basic idea: when most people retire or leave a job, they roll their 401(k) into an IRA. All future withdrawals from that IRA are taxed as ordinary income, including any gains on the company stock. NUA offers an alternative. Instead of rolling the stock into an IRA, you take a direct distribution of the shares into a regular brokerage account. When you do this, generally you only owe ordinary income tax on what the stock originally cost inside the plan, known as your cost basis. The rest of the gain, the appreciation that built up while the shares were inside the plan, is taxed at the lower long-term capital gains rate when you eventually sell the shares. For someone holding highly appreciated company stock in their 401(k), the tax savings can be significant. To qualify, the distribution must be structured as a lump sum, meaning the entire balance of your plan must be distributed in a single tax year, following a qualifying event such as leaving your job, reaching age 59½, becoming disabled, or the death of the account holder. This strategy is not right for everyone, but if you have meaningful company stock inside a retirement plan, it is worth raising with an advisor before making any rollover decisions.6

10b5-1 Plans. If you are an executive or hold a senior role that regularly gives you access to non-public information about your company, such as earnings results before they are announced, your ability to sell company stock can be severely limited. Selling shares while in possession of material non-public information is illegal insider trading, regardless of whether you intend to act on that information. A 10b5-1 plan is a legal structure that helps you navigate this. It works by setting up a pre-arranged schedule for selling shares during a period when you are not aware of any non-public information. Once the plan is in place, the sales execute automatically according to that schedule, even during periods when you do have inside information. Because the decisions were made in advance, the sales are protected from insider trading liability. For executives who want to diversify their holdings in a compliant, structured way, a 10b5-1 plan may be the right tool.5

Bringing It Together

Equity compensation can be one of the most valuable parts of your total pay, but it comes with complexity that is easy to underestimate. The type of grant you hold determines when and how you are taxed. The vesting schedule determines when you have decisions to make. And the accumulation of grants over time creates a concentration in company stock that deserves deliberate attention, not just optimism about where the stock might go.

If you hold company stock grants and are not sure how they fit into your broader financial picture, we would welcome a conversation. Whether you are trying to understand what you have, plan around a large vesting event, or think through diversification, that conversation is a good place to start.

Sources

1. Internal Revenue Service. “Publication 525: Taxable and Nontaxable Income.” IRS.gov. https://www.irs.gov/pub/irs-pdf/p525.pdf

2. Financial Industry Regulatory Authority (FINRA). “Questions Employees Should Ask About Stock Awards.” FINRA.org, Oct. 25, 2024. https://www.finra.org/investors/insights/questions-employees-should-ask-stock-awards

3. Internal Revenue Service. “Topic No. 427: Stock Options.” IRS.gov. https://www.irs.gov/taxtopics/tc427

4. Internal Revenue Service. “About Form 6251, Alternative Minimum Tax – Individuals.” IRS.gov. https://www.irs.gov/forms-pubs/about-form-6251

5. U.S. Securities and Exchange Commission. “Insider Trading Arrangements and Related Disclosures,” Release No. 33-11138 (Dec. 14, 2022). SEC.gov. https://www.sec.gov/files/rules/final/2022/33-11138.pdf

6. Internal Revenue Service. “Publication 575: Pension and Annuity Income.” IRS.gov. https://www.irs.gov/pub/irs-pdf/p575.pdf

7. Internal Revenue Service. “Form 15620, Section 83(b) Election.” IRS.gov, Rev. 4-2025. https://www.irs.gov/pub/irs-pdf/f15620.pdf

Disclosures

This article is provided by McAdam LLC (“McAdam” or the “Firm”) for informational purposes only. Investing involves the risk of loss, and investors should be prepared to bear potential losses. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. No portion of this article is to be construed as a solicitation to buy or sell a security or the provision of personalized investment, tax, or legal advice. Certain information contained in this report is derived from sources that McAdam believes to be reliable; however, the Firm does not guarantee the accuracy or timeliness of such information and assumes no liability for any resulting damages. Securities offered only by duly registered individuals through Madison Avenue Securities, LLC (MAS), member FINRA/SIPC. Investment advisory services offered only by duly registered individuals of McAdam, LLC, a registered investment advisor. Insurance products and services offered through McAdam Financial. Donohue Wealth Management, DBA McAdam LLC and McAdam Financial are not affiliated with MAS.

Any references made regarding the taxable nature of your investments should not be construed as tax advice. McAdam LLC is not a tax advisory firm; therefore, any tax decisions or assumptions should be made/verified with your tax professional.