Turn equity comp into real, diversified wealth

Restricted stock units are the simplest form of equity pay, and the one that most often catches people out — not because they are complicated, but because the tax usually arrives earlier than expected.

• Taxed as income at vest. When RSUs vest, their value on that day is generally treated as ordinary income — much like salary — whether or not you sell. Withholding often does not cover the full bill, which can leave a gap at tax time.
• A fresh cost basis going forward. The shares you keep generally start fresh, with a cost basis equal to the value already taxed at vesting. Anything they gain or lose after that is a separate, later matter when you sell.
• Holding by default is still a decision. Once RSUs vest you simply own company stock. Choosing to keep all of it is an active bet on one company — the same decision you would face if you had been paid cash and used it to buy that stock.

Stock options give you the right to buy shares at a set price. The two common types — incentive stock options (ISOs) and non-qualified stock options (NSOs) — are taxed quite differently, and the distinction drives a lot of the planning.

• NSOs — taxed at exercise. With non-qualified options, the difference between the market price and your strike price is generally taxed as ordinary income when you exercise, with any further gain or loss taxed when you eventually sell.
• ISOs — potentially favourable, but with a catch. Incentive options can qualify for more favourable capital-gains treatment if specific holding periods are met — but exercising them can trigger the alternative minimum tax, an easy and expensive surprise. The rules reward planning ahead.
• Why the label matters. Because the two are taxed on different events and at different rates, the same decision — when to exercise, how long to hold — can lead to very different outcomes depending only on which type you hold. It is worth knowing which you have before you act.

The danger of equity comp is not the tax — it is concentration. Your paycheck, your bonus and a large slice of your savings can all ride on one company at once. When that company does well it feels like genius; when it does not, the losses stack on top of each other.

• Correlated risks compound. A downturn at your employer can hit your salary, your unvested awards and your existing holdings together — the opposite of diversification, all pointing the same way at the worst possible time.
• Comfort is not a plan. Familiarity with your own company makes it easy to hold far more than you would ever choose to buy. The honest test: if you were handed the cash today, how much of it would you put into this one stock?
• Diversifying is the point of it all. Selling down a concentrated position and spreading the proceeds is what turns paper wealth tied to one employer into a portfolio that can fund your actual goals.

Unwinding a concentrated position is rarely an all-at-once decision. It is a process — balancing tax, risk and your own goals — and it is where a regulated advisor, working alongside your tax professional, tends to add the most value.

• Selling on a schedule, not a hunch. A pre-set plan to trim the position over time — sometimes formalised so sales happen automatically — takes the emotion and the second-guessing out of letting go of a stock that has done well.
• Sequencing sales with the tax in mind. Which lots you sell, and when, affects the tax: holding periods, your bracket in a given year, and which shares you bought at what price all feed into a more efficient unwind than selling at random.
• Anchoring it to real goals. The point of diversifying is to fund a life — a home, retirement, education, giving. Tying the sale plan to those goals makes it far easier to follow through than watching the share price day to day.

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