How are stock options taxed in California?
San Francisco native (yes, really). @uw and Lowell High alum. I like to nerd out on fintech, stock options and taxes.
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San Francisco native (yes, really). @uw and Lowell High alum. I like to nerd out on fintech, stock options and taxes.
For startup employees with stock options, taxes are a tricky topic. You can owe taxes several times throughout your stock options journey — including when you exercise your options and when you sell your shares.
But how much you owe is affected by the state you live in. If you’re a resident in California, you’ll be taxed by both the California Franchise Tax Board and the IRS. This makes accurately calculating the tax you owe even more complex.
Plus, the amount of tax you owe will also depend on the type of options you have. For instance, in California:
In this guide, we share the details of how stock options are taxed in California, covering the implications for ISOs, NSOs and RSUs. For each option, we’ll break down the tax you owe when your options are granted, when they vest, when you exercise, and when you sell your shares.
Taxation for stock options is notoriously complex. With our AI equity assistant, Maeve, you can estimate your tax, model different equity scenarios, and plan your wider wealth strategy. Try it here.
When early-stage startups give you equity compensation, it’s usually in the form of incentive stock options (ISOs). ISOs enjoy more favorable tax treatment than other types of stock options, however there will still be tax to pay.
ISOs aren’t taxed when they’re granted nor when they vest.
You won’t owe any California taxes at exercise unless the state’s alternative minimum tax (AMT) is triggered.
Every year you file a tax return, you’re required to calculate your regular tax liability as well as your AMT. The AMT builds up in parallel to your regular tax liability, according to a different ruleset.
At the end of the tax year, you pay either the AMT or your regular tax bill — whichever is highest. Exercising enough ISOs may put your AMT above your regular tax liability, forcing you to pay the additional tax.
However, you can avoid triggering AMT in California entirely, by finding your AMT crossover point. This is the gap left between your current income and the amount that would trigger the AMT. Using your strike price and the current 409A valuation, you can calculate how many options you can exercise this tax year right before you hit the crossover point and have to pay the AMT.
Capital gains and losses are created when you sell an asset for more or less than you spent to buy it. The federal government has a tax system specifically for capital gains and losses.
However, this does not apply in California. Instead, in this state, all capital gains are taxed as ordinary income. The exact rate will depend on your filing status and income.
Non-qualified stock options (NSOs) are a type of options that don’t “qualify” for the same favorable tax treatment as ISOs.
Like ISOs, NSOs aren’t taxed when they’re granted nor when they vest.
At exercise, you pay California income tax on the spread between your strike price and the current 409A valuation. The exact rate will depend on your filing status and income.
One thing to be aware of is that, when you notify your company that you want to exercise NSOs, your company will send you an estimate of the California taxes owed. This is called a withholding estimate and it represents what you must pay to the company in order to exercise your NSOs.
(Note. This withholding estimate is different from the withholding you see on your regular pay stub, where your company holds back money from your wages to cover taxes.)
A common misconception is that your company’s withholding calculation equals your final tax bill. This is not true. Your company will only withhold what it is legally required to.
Often, this means the withholding tax you pay to your employer to exercise your NSOs is less than your final tax bill. As such, you may need to make estimated tax payments throughout the year to supplement the withholding.
Similar to ISOs, gains are taxed at California income tax rates. The exact rate will depend on your filing status and income.
Restricted stock units (RSUs) are a way your employer can grant you company shares at a later time. They’re not options, but actual shares – so you don’t need to exercise them as you would with ISOs or NSOs.
Typically, successful late-stage companies with high valuations offer RSUs as a recruiting and retention tool. At this stage, offering stock options can be less compelling because the strike price is high, making it expensive for new hires to exercise their options.
Employees may need to commit significant cash upfront just to acquire the shares, while still bearing the risk that the company may never have a liquidity event. RSUs remove this upfront purchase requirement, making them a more attractive form of compensation.
RSUs aren’t taxed when they’re granted. However, you are subject to California taxes when the shares are delivered to you. The timing of delivery is determined by your vesting scheme:
When it comes to RSUs, California taxes are calculated as if the company has just given you a cash bonus equivalent to the value of the shares. The amount is reported on your paystub and W2 and taxed as compensation income.
Your company is required to withhold a certain amount for taxes. But remember: your company's withholding won't necessarily equal your final California tax bill. In many cases, the amount withheld is less than what you'll ultimately owe, meaning you may need to make estimated quarterly tax payments to avoid penalties when you file your tax return.
Similar to ISOs and NSOs, gains are taxed at California income tax rates. The exact rate will depend on your filing status and income.
As you’ve seen, there are several key milestones for startup employees with stock options, including the dates when options are granted, vested and exercised, as well as when the shares are sold.
However, it’s entirely possible that you might not live in California when each one of these milestones occurs. For example, you could exercise your ISOs while you’re living in California then move out of state a few months later and sell your shares. Or perhaps you move out of California after your RSUs are granted but before they vest.
So what does this mean for your California taxes?
In cases like this, there isn’t a one-size-fits-all solution — California tax rules depend on the type of equity you have, when key events occurred, and where you were a resident at the time. It's often best to consult a tax professional who can help you navigate your individual situation.
For example, imagine your NSOs vested while you were living and working in California, but you moved to another state before exercising them. Even though you exercise the options after leaving California, you'll generally still owe California income tax on the portion of the equity that vested while you were a California resident.
Another common scenario involves ISOs. Let's imagine you exercise your ISOs while living in California, then move away soon after. Whether California taxes you when you later sell your shares depends on whether the sale is a qualifying or disqualifying disposition.
If you sell the shares a year after the exercise date and two years after grant — and you’ve become a resident of another state — this counts as a qualifying disposition. In this case, California won’t tax the gain you make. Instead, the state in which you’re resident will charge capital gains.
On the other hand, if you sell before the end of the holding period, then this sale will be classed as a non-qualifying disposition. This means that part of your gains will likely be taxed by California.
However, as we noted above, it’s best to discuss this with a tax advisor who can provide guidance on your specific situation.
Making decisions around your equity is complex and high-stakes. And as you will have seen throughout this guide, one of the most consequential factors to consider is taxation.
Your tax bill can often add hundreds of thousands of dollars to the cost of exercise. Unsurprisingly, this can put people off exercising their options entirely.
That’s one of the reasons why we created Secfi. Our founders had once wanted to exercise their options themselves, but realised they couldn’t afford the cost upfront. They set up Secfi, to help other startup employees facing the same prohibitive costs.
Today, we help startup employees and executives get clarity on their options and make the decisions that are right for them. We provide a combination of AI-powered tools and personalized advice from experienced strategists to help you navigate the complexities of equity and taxation.
What’s more, we provide non-recourse financing so that you can exercise your options — and pay any tax you owe — without having to cover the cost out of pocket.
If you’re considering exercising your options in California, here are three ways we can help.
Understanding how taxes apply in California is one thing, but getting to grips with what they mean for your finances is another. Given the complexities of taxation, your final tax bill will depend on your income, how long you’ve held your options, how much they’re worth, and where you live now — among other factors.
Our AI equity assistant, Maeve, can give you the clarity you need to make decisions with confidence. You can use the tool to model exercise decisions, estimate tax liabilities, and compare different scenarios before you take action.
You can explore questions like:
Simply upload your equity and tax information to receive personalized calculations that are designed to help you make more informed decisions.
For illustrative purposes only. Actual results may vary and there is no guarantee of any particular outcome.
Unlike other generic AI chatbots, Maeve uses our proprietary equity and tax calculation engine — to give you specialist knowledge about your equity finance. It’s a way to get clarity on complex tax considerations before making one of the biggest financial decisions of your life.
Sometimes, an AI assistant may not cut it — no matter how smart it might be. To really dig into how state tax rules affect your wealth outcomes, you may want to speak to a specialist in person.
At Secfi, we can connect you with advisors who specialize in equity compensation and understand the unique tax challenges faced specifically by startup employees. While many financial advisors can give you a general picture of your finances, they often simply don’t have the specialist knowledge of equity.
Instead, with Secfi, you can receive expert guidance on:
You can talk to an advisor about your goals, risk tolerance, and wider financial situation, and get personalized recommendations — rather than simply relying on general tax rules.
Plus, they’ll help you build a strategy that will help maximize your wealth into the future too. Find out more about our wealth management services for employees.
Exercising your stock options often requires more than simply paying the strike price. Taxes can represent a substantial portion of the total cost — up to hundreds of thousands of dollars in some cases.
Secfi’s non-recourse financing can help cover both the exercise costs and your tax obligations. You can access the capital you need to exercise while limiting your need to use personal savings or liquidate your other investments.
With Secfi, you can start to benefit from long-term capital gains treatment without having to pay out of pocket and take on significant upfront financial strain.
Plus, because financing is non-recourse, repayment is tied to the outcome of your equity rather than your personal assets. This way, you’ll reduce your exposure to downside risk.
For many startup employees, understanding the tax implications of exercising stock options can be just as challenging as finding the money to exercise them in the first place.
Amanda, an employee at a fast-growing startup, found herself facing exactly that situation. As her company matured, she realised that exercising her ISOs could be an important step toward building long-term wealth. But before making a decision, she wanted to understand the tax consequences — particularly the potential impact of AMT.
While she knew exercising ISOs could trigger AMT, she struggled to find clear answers about how the tax worked in practice and how it might affect her finances. Without a clear picture of her potential tax liability, it was difficult to know when (or even whether) exercising made sense.
To get clarity, Amanda used Secfi's equity planning tools to model different exercise scenarios and estimate her potential tax exposure. By comparing different timelines and outcomes, she was able to better understand how exercising earlier could affect her AMT liability and long-term financial position.
Amanda also needed a way to fund the exercise itself. Rather than using a large amount of personal savings, she used Secfi's non-recourse financing solution to cover the cost of exercising her options.
Her experience highlights a common challenge for California startup employees: taxes can have a major impact on the cost and timing of an exercise decision. Understanding those implications in advance can help you avoid surprises and make more informed decisions about your equity.
Read the full case study: Why a startup employee used Secfi to buy her stock options
Testimonials are specific to an individual Client’s experience and may not be representative of all Clients. Unless otherwise indicated, Clients offering a Testimonial do not receive compensation and their statement does not present a conflict of interest.
Understanding how stock options are taxed in California is an important part of making informed decisions about your equity. While the rules can be complex, planning ahead can help you avoid unexpected tax bills and make better decisions about when and how to exercise.
Secfi helps startup employees navigate these challenges with a combination of equity planning tools, personalized guidance, and non-recourse financing.
Whether you're trying to estimate your tax liability, understand the potential impact of AMT, or fund an exercise without paying out of pocket, Secfi can help you evaluate your options and make decisions with greater confidence.
Ready to better understand your equity? Sign up for Secfi and start planning your next move today.
It depends on the type of equity you hold. If you exercise ISOs, you generally won't owe regular California income tax at exercise, although you may trigger the AMT. If you exercise NSOs, you'll typically owe California income tax on the difference between your strike price and the fair market value of the shares.
Because the rules can be complex, many employees use equity planning tools, such as Secfi's Maeve AI assistant, to estimate their potential tax liability before exercising.
Yes. Unlike the federal government, California does not offer a preferential tax rate for long-term capital gains. Instead, gains from selling shares acquired through stock options are generally taxed as ordinary income at California state tax rates. The amount you owe will depend on your overall income and filing status.
The tax you owe depends on several factors, including the type of equity you hold, your income, your state of residence, the value of your shares, and when you exercise or sell. Many startup employees work with tax professionals or use equity planning platforms such as Secfi to model different scenarios and estimate potential tax obligations before making a decision.
The tool shown here uses artificial intelligence and is for illustrative purposes only and not necessarily indicative of future results and there is no guarantee that similar results can be achieved. The information provided by the tool is not professional advice and is not intended by Secfi, Inc., its affiliates, and Secfi representatives, to be deemed as investment, legal, tax or other professional advice or recommendations of any kind, or to form the basis of any decision to do or to refrain from doing anything. Secfi does not review the accuracy or completeness of the information provided to us within the tool.