--- title: "The Employee's Guide to IPO Taxes: RSUs, Stock Options and the AMT Trap" description: "With a wave of companies going public, a lot of employees are about to discover that stock which felt like paper wealth can trigger a very real tax bill — often all in one year. Here's how RSUs, stock options and the alternative minimum tax actually work." category: "Personal Finance" category_url: https://boursel.com/category/personal-finance author: "Rafael Ortiz" published: 2026-07-02T22:46:00.000Z updated: 2026-07-02T22:46:00.000Z canonical: https://boursel.com/article/the-employee-s-guide-to-ipo-taxes-rsus-stock-options-and-the-amt-trap tags: ["taxes", "ipo", "stock-options", "rsu", "equity-compensation"] --- # The Employee's Guide to IPO Taxes: RSUs, Stock Options and the AMT Trap With a wave of companies going public, a lot of employees are about to discover that stock which felt like paper wealth can trigger a very real tax bill — often all in one year. Here's how RSUs, stock options and the alternative minimum tax actually work. An IPO can turn years of stock grants into life-changing money. It can also hand you a tax bill bigger than the cash you actually have — because the taxman often shows up before you're allowed to sell. Here's the map. ## The three kinds of equity Most employees hold one or more of three types of equity, and each is taxed differently. **Restricted stock units (RSUs)** are the simplest — and the most immediate. They are shares that "vest" (become yours) over time, and when they vest, their full value counts as **ordinary income**, taxed like salary at rates up to 37%, [as the IRS treats such compensation](https://www.irs.gov/taxtopics/tc427). If 10,000 units vest at $50 on IPO day, that's $500,000 of taxable income that year — whether or not you sell a single share. **Incentive stock options (ISOs)** are options to *buy* shares at a fixed "strike" price. You owe no ordinary tax when you exercise them, which is their advantage — but the paper gain can trigger the alternative minimum tax (more below). If you then hold the shares long enough, your profit is taxed at the lower long-term capital-gains rate. **Non-qualified stock options (NSOs)** get no special break: the gap between your strike price and the market price is taxed as **ordinary income the moment you exercise.** ## Ordinary income vs. capital gains — and the one-year line The single most valuable concept here is the difference between **ordinary income** (up to 37%) and **long-term capital gains** (0%, 15% or 20%, plus a possible 3.8% surtax for high earners), [per the IRS](https://www.irs.gov/taxtopics/tc409). Once you own shares, holding them **more than a year** before selling generally converts your gain from the higher ordinary rate to the lower long-term rate. That gap — potentially 37% versus 15% — is why timing matters so much. ISOs carry a stricter version of this rule: to get the best treatment you must hold the shares **at least one year from exercise and two years from the original grant.** Miss those windows and the gain reverts to ordinary income. ## The AMT trap Here is where high earners get surprised. The **alternative minimum tax (AMT)** is a parallel tax calculation; you pay whichever is higher, your regular tax or the AMT. When you **exercise ISOs**, the "spread" — the difference between your strike price and the stock's value that day — counts as income under the AMT even though you haven't sold anything. Exercise a big block of ISOs the same year your RSUs vest, and the combined paper gains can push you into an AMT bill on money you never received in cash. Modeling that math **before** year-end, not at tax time, is the whole game. ## The cash-flow squeeze Two timing problems trip people up. First, RSU tax withholding is often too low: employers typically withhold at a **flat 22% supplemental rate**, but a big IPO windfall can put you in a 32%–37% bracket — leaving a gap you'll owe at filing. Second, **lock-up periods** — commonly around **180 days** after an IPO — can bar you from selling shares even as the tax on them comes due. If the stock falls during the lock-up, you can end up owing tax on a peak value that has since evaporated. That is the nightmare scenario equity-comp advisers warn about most. ## Don't fall in love with the stock The final risk is **concentration.** After an IPO, a huge share of your net worth may sit in a single volatile stock. Selling some to **diversify and to cover the tax** isn't disloyal — it's prudent. Spreading sales across more than one tax year can also smooth the bill and avoid one enormous "income year." ## Why it matters For **employees at newly public companies**, the difference between planning and winging it can be six figures — the tax code rewards those who understand holding periods and the AMT and punishes those who don't. For the **broader IPO wave**, a rush of companies going public means thousands of workers facing this math at once, often for the first time. Boursel gives general information, not individualized tax advice — the rules are genuinely complex, and a qualified tax professional usually pays for themselves. The takeaway is simple: **your equity is a financial asset with a tax bill attached, not free money** — and the time to plan for it is before the shares vest, not after. ## Sources - [How much tax will I pay on IPO stock?](https://www.nerdwallet.com/investing/learn/how-much-tax-will-I-pay-on-IPO-stock) - [Topic no. 427, Stock options](https://www.irs.gov/taxtopics/tc427) - [Topic no. 409, Capital gains and losses](https://www.irs.gov/taxtopics/tc409)