Your Company Is Going Public. Here Is What You Need to Do About Your Taxes Before It Does.

By Alton Moore, Esq, CPA

By the time your company’s stock is public and liquid, most of your tax decisions have already been made for you. The type of equity you hold set the tax treatment. The timing of your vesting and exercises set when the income lands. Where you lived on the key dates set which states can tax it. The planning window is before the liquidity event, not after.

This guide is for employees at a late-stage private company approaching an initial public offering or another liquidity event, holding some mix of incentive stock options, non-qualified stock options, and restricted stock units. It covers the decisions that still matter while the stock is private, and the ones that quietly close as the offering approaches.

Here is the short version of what to do before the IPO. Decide whether and when to exercise your options, model your alternative minimum tax exposure, confirm whether your shares qualify for the QSBS exclusion, check how California will tax the gain, and weigh moving low-value shares into a trust while they are still cheap. Each of these carries a deadline that passes before the offering, and getting them right is often the difference between keeping and losing seven figures of the eventual proceeds.

Your equity type determines your tax outcome, and it is not the same for all three

Employee stock options come in two forms, incentive and non-qualified, and alongside restricted stock units they are taxed on different triggers and at different rates. An employee who holds all three needs a separate tax strategy for each tranche, not one approach applied across the board.

Incentive stock options (ISOs)

Under §422, an ISO creates no regular income tax at grant or at exercise. The catch is the alternative minimum tax: the spread between the fair market value at exercise and your strike price is an AMT preference item. Hold the shares more than one year after exercise and more than two years after grant, and the sale is a qualifying disposition taxed entirely as long-term capital gain. Sell sooner and it becomes a disqualifying disposition, with the spread taxed as ordinary income.

Non-qualified stock options (NSOs)

At exercise, the bargain element, meaning fair market value minus your strike price, is ordinary income under §83, reported on your W-2 with income and payroll tax withheld. Your employer sets the strike, also called the exercise price, at fair market value on the grant date, supported by a 409A valuation. After exercise, your basis equals what you paid plus the income you already recognized, so later appreciation is capital gain.

That 409A valuation matters to you, not only the company. If the strike is set below fair market value, §409A treats the discount as deferred compensation and the cost falls on the employee: the income becomes taxable as the option vests, plus a 20% additional tax and interest. It is worth confirming your options were granted at a supportable fair market value, because a pricing failure is expensive and hard to fix later.

Restricted stock units (RSUs) and double-trigger vesting

Restricted stock units are a promise to deliver shares once conditions are met. At most private companies they carry double-trigger vesting: a time or service requirement and a liquidity event such as an IPO. When both are met, usually at or shortly after the offering, the full value of the vested shares becomes ordinary income at once. There is little strategic planning available after that trigger fires.

Restricted stock and the §83(b) election

Employees who hold actual restricted stock, or who early-exercise unvested options, can file a §83(b) election to be taxed now, on today’s low value, rather than as the shares vest at higher values. You must file within 30 days of receiving the stock, and the deadline cannot be extended. Since November 2024 the IRS has offered Form 15620, a standardized election form that can be filed electronically. The election is available for ISO shares as well (Treas. Reg. §1.83-2). One risk to weigh: if the shares are later forfeited, no deduction is allowed for the forfeiture.

The ISO opportunity, and the AMT trap inside it

Pre-IPO ISO exercise is the highest-impact planning move available to most tech employees, and the alternative minimum tax is the reason it feels risky. The clearest way to think about it is the way we explain it to clients:

AMT is effectively an upfront payment of tax that converts future appreciation to capital gain treatment.

Exercising while the 409A value is low locks in a small spread. Holding the shares to a qualifying disposition then turns the gain into long-term capital gain. Employees who delay exercise specifically to avoid the AMT often pay more overall, because the appreciation between exercise and sale is taxed as ordinary income in a disqualifying disposition rather than as capital gain. The AMT is not the enemy. Delaying exercise to avoid it is frequently the more expensive choice.

For regular tax, exercising an ISO is a non-event. The AMT runs a parallel calculation that is not. Under §56(b)(3), the spread is added to your alternative minimum taxable income in the year of exercise, and you pay whichever system produces the higher tax. A large exercise can produce a significant AMT bill in a year when you sold nothing and received no cash.

Consider a California employee at a pre-IPO technology company holding 500,000 ISOs with a $2 strike, when the 409A value is $12 and the company is targeting an expected IPO price around $40 per share. Exercising now creates a $10 spread per share, which is $5 million of AMT preference income, even though not a single share has been sold. That drives a large AMT bill in the exercise year. It also starts the clocks: hold more than one year from exercise and two years from grant, and the gain from your $2 basis up to the eventual sale price is long-term capital gain rather than ordinary income. Wait until after the IPO to exercise and sell quickly, and much of that same gain is taxed as ordinary income instead.

The 2026 AMT numbers

The 2026 figures make the exercise-year math sharper than before. The AMT exemption is $90,100 for single filers and $140,200 for joint filers. Above the exemption the rate is 26%, rising to 28% on the AMT base over $244,500. The exemption phases out for high earners, and the One Big Beautiful Bill Act reset that phaseout to begin at $500,000 for single filers and $1,000,000 for joint filers beginning in 2026, while doubling the phaseout rate to 50 cents on the dollar. A large ISO exercise pushes income into that range, so the exemption you counted on can disappear.

Recovering the AMT credit, and the dual basis

The AMT is not always a permanent cost. AMT paid because of an ISO exercise generally becomes a minimum tax credit under §53, recoverable in later years when your regular tax exceeds your tentative minimum tax, claimed on Form 8801. Part of the hit is therefore timing. One complication to track: your shares carry a dual basis, the strike price for regular tax and the higher fair market value at exercise for AMT, and the two must be tracked separately for the credit to work correctly. This is a reason to have a tax advisor run the calculation rather than handle it alone.

§1202 QSBS, the federal exclusion that can eliminate the federal capital gain

Qualified small business stock can exclude a large amount of gain from federal tax under §1202, but it is the benefit most often assumed to apply when it does not. Confirm eligibility before you count on it.

Do your shares even qualify

To issue QSBS, a company can have no more than $75 million in aggregate gross assets at the time the stock is issued, measured from inception through immediately after issuance. For options, that test is applied at exercise, which is when the stock is acquired, and the holding period starts then too. Once a company has ever crossed the threshold, stock it issues afterward can never be QSBS, with no cure. Many late-stage companies passed $75 million years and several funding rounds ago, so an employee exercising today often holds stock that does not qualify, while an early employee who exercised when the company was small may hold genuine QSBS. Typical software and technology companies are eligible businesses, so it is the asset ceiling, not the industry, that usually disqualifies. Two further requirements are built in: the issuer must be a domestic C corporation, and at least 80% of its assets must be used in the active conduct of a qualified trade or business, which is rarely the obstacle for an operating technology company. RSUs generally do not qualify, because the shares are issued at settlement, long after the company outgrew the test.

The rules by acquisition date

QSBS feature	Acquired on or before July 4, 2025	Acquired after July 4, 2025
Per-issuer exclusion cap	Greater of $10 million or 10x basis	Greater of $15 million or 10x basis
Holding period for exclusion	5 years for the full 100%	50% at 3 years, 75% at 4 years, 100% at 5 years
Company asset ceiling at issuance	$50 million	$75 million

For stock acquired after July 4, 2025, the exclusion is tiered: three years reaches 50%, four years 75%, and five years the full 100%. Stock acquired earlier keeps the older all-or-nothing rule requiring a five-year hold. You cannot move old stock into the new regime by exchanging it, because the acquisition date and holding period carry over. The portion of gain that is not excluded under the 50% or 75% tiers is taxed at up to 28%, plus the 3.8% net investment income tax. The excluded gain is not an AMT preference item: the 7% add-back that once applied to partial exclusions now reaches only stock acquired on or before September 27, 2010.

One feature drives some of the most valuable planning of all. The exclusion cap applies per taxpayer and per issuer, and a properly drafted non-grantor trust is a separate taxpayer, so gifting QSBS to more than one such trust before a sale can multiply the exclusion. That ties equity planning directly to estate planning.

California does not conform, and that changes the math entirely

California has never conformed to §1202, and the One Big Beautiful Bill Act did not change that. A California resident who qualifies for a full federal QSBS exclusion still owes California income tax on the entire gain, at rates up to 13.3%, and up to 14.4% for the highest earners. Combined with federal tax, that means a top-bracket California resident can face an effective rate near 37.1% on a fully taxable long-term capital gain, the 20% federal rate plus the 3.8% net investment income tax plus 13.3% to California. There is no California workaround that applies at the time of sale. The state’s general conformity provision, Cal. Rev. & Tax Code §17024.5, was updated in 2025 but still does not adopt §1202.

The residency rule differs by equity type

For a qualifying ISO disposition, the entire gain is capital gain from the sale of intangible personal property, which California sources to your state of residence at the time of sale. A genuine move out of California before that sale can eliminate California tax on the whole gain, not merely the appreciation after the move. This is a larger opportunity than most employees realize.

For NSOs and disqualifying ISO dispositions, the income is compensation, sourced by the share of your California workdays over the period from grant to vest. Relocating reduces California’s claim to the out-of-state portion but does not erase the part attributable to California service. California also imposes a flat 10.23% withholding on option compensation paid to nonresidents for California work.

Changing residency has to be real

Ceasing to be a California resident requires leaving for other than temporary or transitory purposes, a facts-and-circumstances standard the Franchise Tax Board applies strictly and reviews closely around liquidity events. A nominal address change or a brief relocation will not hold. A move made deliberately, well ahead of the IPO, with genuine substance behind it, is what holds up when the state asks.

The lock-up problem, 180 days between the IPO and when you can sell

Most IPOs carry a lock-up period, commonly lasting roughly six months, about 180 days, during which employees cannot sell. For an autumn offering, that expiry lands the following spring. The collision is simple: your tax event can arrive months before you are allowed to sell shares to pay it.

Two versions of the problem recur. You may pay AMT on an ISO exercise based on a value that falls before the lock-up lifts. Or your double-trigger RSUs may be taxed as ordinary income at the IPO-day value, and then the shares decline before you can sell. In both cases the later loss is a capital loss, and a capital loss offsets only capital gains plus $3,000 of ordinary income per year, so you can owe tax on value that evaporated before you could reach it. This is one of the most damaging outcomes in equity compensation, and it has to be managed before and during the lock-up rather than at tax time.

The tax responses are practical: a cashless exercise of NSOs can build a reserve to cover the AMT before the IPO, estimated tax payments can close the gap left by withholding and avoid underpayment penalties, and the sale calendar can be planned around the lock-up expiry, often through a 10b5-1 plan that pre-schedules sales for after the lock-up lifts. Whether and how much to sell is your financial advisor’s call, weighing concentration risk against diversification. Our focus is the tax and legal side of each sale.

The planning windows, and what closes when

Three windows open and close in sequence, each with its own decisions.

The first runs from now until the IPO. This is where the highest-value moves live: ISO exercise decisions, §83(b) elections, AMT modeling, a California residency review, and gifting or trust planning while the fair market value is still low. Almost everything that matters is decided here.

The second runs from the IPO through the lock-up expiry. Sales are not possible for locked shares, so the work is preparation: estimated tax payments, tracking the AMT credit and dual basis, and readying the sale plan for the moment the lock-up lifts.

The third opens after the lock-up. Now the questions are sale timing, whether to spread a large block over time, gifting appreciated shares to a donor-advised fund before a sale, and reviewing the estate plan in light of the new liquidity.

Offsetting strategies, managing the tax bill once the event hits

The AMT from ISO exercise and the ordinary income from NSO exercise or RSU vesting create a large liability that can be managed rather than simply absorbed. These are categories of strategy, not recommendations of specific products, and each one should be evaluated with both a tax advisor and a financial advisor before you act.

Certain investments generate ordinary losses that can offset ordinary income from equity events. Oil and gas working interests are the common example: intangible drilling costs are deductible under §263(c), and a working interest is treated as non-passive under §469(c)(3), so the losses can offset ordinary income including equity compensation. There is a strict condition. The interest must be held through an entity that does not limit your liability. Hold it through a limited partnership or an S corporation and the exception is lost, and the losses turn passive and unusable against wage or equity income. At-risk limits under §465 also apply. This is a strategy that depends entirely on its structure, so it calls for counsel before investing. Note the contrast with capital losses, which offset only capital gains plus $3,000 of ordinary income a year, and so do little against NSO or RSU income.

Qualified Opportunity Zone investing works differently than it once did for a current-year event. Under §1400Z-2, deferred gain is recognized no later than December 31, 2026, and the One Big Beautiful Bill Act did not extend that date. For a 2026 liquidity event, a Qualified Opportunity Fund therefore offers no real deferral, because the gain is recognized in the same year. Its remaining value is forward-looking: hold the fund investment for ten years and the post-investment appreciation can be excluded from federal tax. You still pay tax on the 2026 gain, but future growth in the fund can be federally tax-free.

Charitable giving fits employees with philanthropic intent. Contributing long-term appreciated stock to a donor-advised fund or qualified charity under §170 avoids capital gain on the donated shares and produces a deduction at fair market value, subject to percentage-of-income limits, which is most useful in a high-income year.

Finally, some rank-and-file employees can use a §83(i) election to defer the ordinary income from qualifying option exercises or RSU settlements for up to five years, or until the stock becomes tradable. It is not available to excluded employees, meaning 1% owners, the chief executive, the chief financial officer, and the four highest-compensated officers, so many senior employees will not qualify.

The liquidity event may not be an IPO

Some employees reach liquidity through a company-sponsored tender offer or a secondary sale rather than a traditional IPO. The tax analysis is the same, and it still turns on whether the shares are ISOs in a qualifying disposition, ISOs in a disqualifying disposition, or non-ISO shares. The difference is speed. The window between a tender offer being announced and closing can be as short as 30 to 60 days, which is not enough time to model the AMT, confirm holding periods, and structure an offsetting strategy from a standing start. The planning has to be done before any specific event is on the table.

Plan the wealth transfer before the value shows up

The pre-IPO window is also the best estate planning opportunity most people will ever have, and it closes the moment the stock becomes valuable. Moving shares to the next generation now, while the value is low, transfers all of that future growth out of your taxable estate at a fraction of the eventual cost.

Under the One Big Beautiful Bill Act, the lifetime gift and estate tax exemption is $15 million per person and $30 million for a married couple beginning in 2026, now permanent and inflation-adjusted. A gift of pre-IPO stock uses exemption measured at today’s low value. If shares worth $2 million today are worth $20 million after the IPO, gifting them now moves $18 million of appreciation out of your estate while using only $2 million of exemption.

The trusts that move appreciation

A grantor retained annuity trust suits volatile, high-growth stock. You contribute shares and take fixed annuity payments back over a term, and any appreciation above a modest IRS rate passes to your beneficiaries free of gift tax, often using almost none of your exemption. A spousal lifetime access trust moves shares into an irrevocable trust for your spouse’s benefit, locking in exemption at today’s value while your spouse keeps indirect access. A sale to an intentionally defective grantor trust freezes the value another way, and because you keep paying the income tax on the trust’s earnings, that payment becomes a further tax-free transfer to your heirs.

Timing and valuation

A gift of private stock needs a defensible valuation, and the low valuations available while a company is private are what make these transfers efficient. Once an IPO is on file and a price range is public, the value climbs, discounts shrink, and the same gift costs far more exemption. The opportunity is widest before the offering is in sight, and it is the point where equity, income tax, and estate planning for high-net-worth families stop being separate exercises.

Getting the timing right takes a coordinated team

Every decision here depends on the others. When you exercise affects your AMT and your QSBS clock. Whether you gift shares affects your estate and your exemption. Where you live affects which states tax the income. A tax attorney and CPA handle the income tax, the equity mechanics, and the gift and estate structures, while your financial advisor or financial planner handles the investment side of your financial planning, including concentration risk, diversification, cash flow, and the timing of post-IPO sales. Many of the people we help arrive through their financial advisor, once the equity and tax questions outgrow what any single advisor handles alone.

If your company is heading toward an initial public offering or another liquidity event, the value of planning is highest while the stock is still private and the choices are still open. A consultation is the right first step to map your equity, model the tax, and decide which moves belong in your plan and when.

Frequently asked questions

What is the difference between an ISO and an NSO for tax purposes?

The difference is when the income is taxed and at what rate. Incentive stock options create no regular tax at exercise, though the spread is an alternative minimum tax preference item, and a qualifying disposition is taxed as long-term capital gains. Non-qualified stock options are taxed as ordinary income tax on the spread at exercise, reported on your W-2. Both are employee stock options, but they call for different tax planning.

Should I exercise my stock options early, before my company’s IPO?

Exercising pre-IPO, while the fair market value is low, keeps the spread and the AMT small and starts your long-term capital gains and QSBS holding periods. The tradeoff is spending cash on shares that stay illiquid and could lose value. Because delaying to avoid the AMT often raises your total tax, pre-IPO planning on exercise timing is a decision to model with a tax advisor rather than postpone.

What is the AMT and how does it apply to incentive stock options?

The alternative minimum tax is a parallel calculation that, for incentive stock options, adds the exercise spread to your taxable income even though the regular tax ignores it. You can owe a significant AMT bill with no sale and no cash. The useful framing is that AMT is an upfront payment that converts future appreciation into capital gain treatment, and much of it can return later as an AMT credit.

What is QSBS and does it apply to tech employee stock options?

Qualified small business stock under §1202 can exclude a large amount of gain from federal tax, up to $15 million or more for stock acquired after July 4, 2025. Many employees do not qualify, because the company must have had under $75 million in gross assets when the shares were issued, and most late-stage pre-IPO companies passed that mark years earlier. Employees who exercised early are the most likely to hold qualified small business stock.

Does California recognize the §1202 QSBS exclusion?

No. California does not conform to §1202, so a California resident owes state tax on the full gain even when it is excluded federally, at rates up to 13.3% and up to 14.4% for the highest earners. Combined with federal tax, a fully taxable long-term gain can carry an effective rate near 37.1% for a top-bracket California resident. There is no California workaround at the time of sale.

Can I move out of California before an IPO to reduce the tax?

Sometimes, and it depends on the equity type. A genuine move before a qualifying ISO disposition can eliminate California tax on that entire gain, because it is sourced to your state of residence at sale. Compensation income from non-qualified stock options and disqualifying dispositions stays partly California-source based on your workdays there, and any move must be real and well documented to survive review.

What happens if I exercise ISOs and the stock price drops after the IPO?

You can be left owing tax on value you never received. AMT is measured at the exercise value and RSU income at the IPO price, so a later decline becomes a capital loss that offsets only $3,000 of ordinary income per year. This phantom-income risk is why the lock-up period and the sale calendar have to be planned before the public company shares can be sold.

How does the 180-day lock-up period affect my tax planning?

The lock-up, commonly lasting roughly six months, means your tax event can arrive months before you are allowed to sell shares to pay it. Employees plan for this with estimated tax payments, a cash reserve built before the IPO, and a sale calendar timed to the lock-up expiry, often set up in advance through a 10b5-1 plan.

What is a §83(b) election and when should I use it?

A §83(b) election lets you be taxed now, on the current low fair market value, when you receive restricted stock or early-exercise unvested options. You must file within 30 days of receiving the stock, now optionally on Form 15620, and the deadline cannot be extended. It is most useful when the value is low and you expect the shares to appreciate.

When should I hire a tax attorney for pre-IPO equity tax planning?

Before the IPO, while the highest-value decisions are still open. The exercise timing, the AMT modeling, the QSBS and California analysis, and any gifting all have to happen while the stock is private. Coordinating a tax attorney and CPA with your financial planner early is what turns pre-IPO equity into a tax strategy rather than a tax bill.

This article is for informational purposes only and does not constitute legal or tax advice. Tax laws and regulations change frequently and may affect the accuracy of this information. Consult a qualified tax attorney or CPA before making any decisions based on the content of this article.