Capital Gains Tax

Tax on profit from selling an asset — with lower rates for assets held longer than one year, and direct relevance to RSUs, stock options, and ESPP shares.

Capital gains tax applies to the profit you make when you sell an asset — stocks, real estate, cryptocurrency, or other investments — for more than you paid for it. The IRS distinguishes between short-term capital gains (assets held one year or less, taxed as ordinary income at your regular bracket rates) and long-term capital gains (assets held more than one year, taxed at preferential rates of 0%, 15%, or 20% depending on income). This distinction has enormous financial implications for employees with equity compensation.

For workers with RSUs, stock options, or ESPP shares, understanding capital gains is essential. When RSUs vest, you pay ordinary income tax on the fair market value at vesting — this becomes your cost basis. If you hold the shares and later sell at a higher price, the gain above your basis is a capital gain: short-term if you sell within a year of vesting, long-term if you hold longer. With ISO stock options, the spread at exercise may create an AMT adjustment, and qualifying dispositions (holding 2 years from grant, 1 year from exercise) receive long-term capital gains treatment on the full gain.

Capital losses can offset capital gains — if you sell losing positions, you can use those losses to cancel out gains dollar-for-dollar, and up to $3,000 of net losses can offset ordinary income per year. Unused losses carry forward indefinitely. This creates planning opportunities: intentionally harvesting losses in a down market to offset gains elsewhere in your portfolio is a common strategy called tax-loss harvesting.

Capital Gains Rates (2024)

  • 0% long-term rate: single filers with taxable income up to $47,025; married filing jointly up to $94,050.
  • 15% long-term rate: single filers $47,026–$518,900; married $94,051–$583,750.
  • 20% long-term rate: above those thresholds.
  • Short-term gains: taxed as ordinary income — at your regular bracket rate (up to 37%).
  • Net Investment Income Tax (NIIT): an additional 3.8% on investment income (including capital gains) for single filers above $200K and married above $250K.
  • State taxes: most states also tax capital gains, often at ordinary income rates.

Equity Compensation and Capital Gains

  • RSUs: ordinary income at vesting (on FMV at vest). Hold beyond 1 year → long-term gain on appreciation above vest price.
  • NSOs (Non-Qualified Stock Options): ordinary income at exercise on the spread (FMV minus strike). Post-exercise appreciation → capital gain.
  • ISOs (Incentive Stock Options): no ordinary income at exercise (but AMT adjustment on spread). Hold 2 years from grant + 1 year from exercise for qualifying disposition → full gain at long-term rate.
  • ESPP: complex — typically a mix of ordinary income and capital gain depending on offering period length and disposition timing.

Practical Planning

  • Hold RSU shares at least 12 months after vesting to convert short-term gains to long-term — saves 10–20+ percentage points on the gain.
  • Avoid selling appreciated assets in years with high ordinary income — your long-term rate may be 15% or 20% but won't change regardless.
  • Tax-loss harvesting: realize losses to offset gains; be aware of the wash-sale rule (can't buy back the same or substantially identical security within 30 days).
  • Donate appreciated stock to charity: you avoid capital gains entirely and get a deduction for the full FMV.
  • Step-up in basis: assets inherited at death receive a stepped-up basis to FMV — eliminating embedded capital gains accrued during the decedent's lifetime.

Example

An employee receives 1,000 RSUs that vest when the stock price is $50 ($50,000 ordinary income, withheld and taxed at vesting). She holds the shares. Eighteen months later, the stock is at $80. She sells, realizing a $30,000 long-term capital gain taxed at 15% ($4,500) rather than her 32% ordinary income rate ($9,600) — saving $5,100 by waiting 6 more months after the 1-year threshold.