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Equity taxes for startup employees

Startup tax is about liquidity timing — know what is taxable before you can sell.

Rates and rules change. Content is reviewed for tax year 2026. Check the last-reviewed date and methodology on each page, then confirm against IRS or state guidance before you file.

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In plain terms

At a startup, the central tax problem is timing and liquidity: you can owe tax before there is any way to sell. Whether you hold options or , and whether elections like 83(b) apply, decides when the tax actually lands.

How the tax works

Startups grant different instruments: , , or , each taxed at different moments.

Exercising options can trigger () or exposure () before any sale.

Private may have settlement conditions tied to a liquidity event; check your specific terms.

Elections such as 83(b) are deadline-driven and can change when income is recognized.

What to check on your end

  • Exactly what you were granted and the key terms.
  • When tax is triggered under your grant, exercise, , or liquidity.
  • Whether early exercise and 83(b) are available and their deadlines.
  • Your cash position for tax with no easy way to sell.
  • What an IPO, , or acquisition would mean for you.

Common mistake

Assuming nothing is taxable until there is a liquidity event. Exercising options or shares can create tax well before you can sell anything.

Example scenario (hypothetical)

Illustration only, not your tax situation.

Example: an early employee exercises options while the company is private. The spread creates a tax bill that year, but there is no market to sell into, so the tax must come from other cash.

When a CPA is worth it

  • You are deciding whether to exercise or make an .
  • A liquidity event is approaching.
  • You hold a mix of options and .
  • You are unsure when your equity becomes taxable.

Sources and notes

Primary tax claims on this page are supported by the official and secondary sources below. Broker and software links describe reporting mechanics — confirm rules against IRS or state guidance.

Employee equity tax planning context — not role-specific tax law.

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VestingTax.com is not a CPA firm or tax preparer. Grants, employers, and states all differ. Use the cited IRS and state sources above, your own documents, and a qualified tax professional before you make decisions from this guide.

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