Year-End Planning: Key Items For Your Stock Comp Checklist


When you acquire stock options from your pre-IPO employer, your liquidity is severely limited. The most common ways executives and employees are able to sell their private company shares is through IPO, SPAC acquisition, or direct listing on a public exchange. However, companies can also create opportunities for their employees to sell their shares even before these types of liquidity events.

When you have stock options, restricted stock, or other forms of equity compensation from your employer, it’s imperative to engage in continuous, multi-year tax planning. The end of the year is a key time to evaluate your income, your holdings, and your expected tax liability. Having a clear picture of these variables is essential to managing your tax obligation and getting the most out of your company stock.

Below are several items to consider as we near year’s end. While it’s always important to be aware of these factors, each must be understood in the context of your overall financial picture and unique goals. None should guide your financial strategy on its own.

Review your financial goals.

Clear financial goals are the cornerstone of any sound investment strategy. Before you make any major decisions, check in with your overarching goals first. For example, do you want to retire in style, fuel a cause you’re passionate about, or buy a new vacation home? Which strategies will be most effective depends on what you want your money to do for you and when.

Estimate current and future income.

Income projections are critical for guiding your exercise strategy and managing any resulting tax obligations. At year’s end, it’s important to understand your taxes based on both the regular tax calculation and, if applicable, the AMT. Additionally, having an idea of what income to expect in future years will provide the best opportunity to accelerate or defer income to your greatest tax advantage.

Review your holdings, vesting schedule, and anticipated IPO date.

Equity compensation takes several forms, and you might have more than one type in your portfolio. A comprehensive picture of what you own, when shares will vest, and, if you’re in a pre-IPO company, when it plans to go public, is essential for effective tax planning. Additionally, it’s important to know the duration of your lockup period and any blackout periods, which will restrict your ability to sell your shares.

Below are some of the special considerations to keep in mind for various types of holdings:

Incentive Stock Options

If you own incentive stock options (ISOs), the bargain element of exercise is excluded from regular income tax. However, shares that you exercise and then hold beyond year’s end will be included in the alternative minimum tax (AMT) calculation. When deciding whether, when, and how much of your ISOs to exercise, it’s important to understand how exercise will affect your tax obligation under the AMT. Often, income projections illuminate the opportunity to exercise a portion of ISOs with no additional tax liability.

Restricted Stock & Non-Qualified Stock Options

If you have non-qualified stock options (NSOs) or the opportunity to purchase shares via a restricted stock award (RSA), the bargain element is included with your W-2 earnings for the year. Although employers withhold taxes on restricted stock from employees’ paychecks, withholding is often insufficient and needs to be supplemented. If this applies to you, make sure you have a plan to pay any additional tax you will owe.

If you have RSUs, it’s critical to understand whether they have a single or double vesting trigger. Single-trigger RSUs vest incrementally according to an established schedule. This makes planning for the tax consequences of vesting fairly straightforward. Sometimes, however, RSUs have two vesting triggers: time in service and a liquidity event (i.e., IPO, SPAC acquisition, or direct listing). That means all RSUs that have met their first vesting trigger will vest at the moment the company goes public, or close to it. For some pre-IPO employees, this results in a shocking tax bill. Anticipating this event well ahead of time lets you make a plan to manage the tax impact.

Make decisions about accelerating or deferring income.

When you know your tax picture at year’s end, you can make informed choices about what income to realize in the current year and what to put off. For example, if you expect a significant income boost with your company set to go public next year, you may want to exercise as many options as possible to realize the income in the current year. On the other hand, if the current year saw a significant income spike, you may want to put off selling appreciated shares until next year.

If Available, Consider Early Exercise & 83(b) Election

Some companies allow employees to exercise their stock options prior to vesting. This practice, commonly known as early exercise, can sometimes allow investors to save impressive amounts on their tax bills. That’s because before IPO, employees’ exercise price is often close to or the same as the shares’ fair market value, making the bargain element around zero. To claim the bargain element at the time of early exercise, however, the taxpayer must file an 83(b) election within 30 days of exercise. RSA recipients may also take advantage of this provision by filing an 83(b) election within 30 days of their stock grant.

Early exercise, however, involves inherent risk. Before vesting, your shares are subject to forfeiture. Additionally, your shares could end up being worth less than the exercise price at the time of vesting. In this case, filing an 83(b) would result in an overpayment of tax. It’s important to work with a professional investment advisor who has an in-depth knowledge of the IPO process when contemplating early exercise and 83(b) filing.

If shares have lost value, consider tax loss harvesting.

It can seem counterintuitive to sell shares at a loss. Many investors try to wait out the market, however, it could be a great benefit to do capture the loss. Executed appropriately, tax loss harvesting can be a highly effective part of a plan to manage your tax burden.

Consider charitable giving.

Another way to reduce your income tax burden is to give some of your earnings to charity. When you make a charitable donation of appreciated stock that you’ve held for more than a year, you can claim a deduction for the stock’s full market value at the time of the donation and avoid the capital gains tax that would apply to their sale. There are restrictions based on income, so be sure to talk to your tax preparer.

Work with a trusted advisor.

These are just some of the many considerations that go into year-end tax planning. When you have equity compensation, continuous, year-to-year planning with trusted, knowledgeable professionals is essential. WRP Wealth specializes in providing holistic wealth management to pre-IPO shareholders like you. We work with our partner, WRP Tax, to create comprehensive financial, investment, and tax plans that are specifically designed to help our clients meet their individual goals. Learn more about our approach, or browse our library of free resources for more IPO and tax planning tips.

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