Should You Hold or Sell RSUs & NQSOs?
If you receive restricted stock units or non-qualified stock options from your employer, at some point you are going to face a decision that impacts your financial plan: what should you do with the company stock?
The obvious answer is to look at the stock and decide whether you think it is going up or down. That can be part of the analysis, but it is rarely the most important question. Equity compensation is different from an investment you chose to purchase in a brokerage account because your financial relationship with the company goes beyond the shares themselves. Your salary, future equity grants, and career may depend on the company. And if you continue holding a significant amount of employer stock, your investment portfolio depends on the company as well.
That creates a unique planning issue. You may have a high degree of confidence in your employer and still have too much of your financial life tied to one company. That being said, selling every share immediately is not necessarily the right answer either. The appropriate decision depends on the size of the position and your other assets, future compensation, tax situation, financial goals, and amount of risk you are willing to accept.
Before getting into whether you should hold or sell, it is important to understand what you actually own and when the tax consequences occur.
RSUs: What Happens When They Vest?
An RSU represents a right to receive shares (or sometimes cash) once the vesting requirements are satisfied. When the RSUs vest and the shares are delivered, their value is treated as ordinary compensation income.
For example, assume 1,000 RSUs vest when your company's stock is trading at $100 per share. That creates $100,000 of compensation income. The fact that you received stock rather than cash does not change the general tax treatment.
You also should not assume that 1,000 shares will appear in your brokerage account. Your employer generally has an obligation to withhold taxes on the compensation income. Depending on the company's plan, this may be handled by withholding shares or selling shares to cover the taxes.
Let’s say the company withholds 300 shares to cover taxes. You are left with 700 shares worth approximately $70,000. That $70,000 is the investment decision you now have to make.
Employees sometimes think about an RSU vest as though they received $100,000 of stock and are now deciding whether to keep the entire $100,000 invested. But, the tax withholding has already reduced the number of shares you own. Your decision after the vest is whether you want to continue investing the approximately $70,000 that remains in your employer's stock.
That is why I like to reframe the question after an RSU vest: would you invest the after-tax value of those shares in your employer's stock if you were receiving the money as cash?
If the answer is yes, holding may be reasonable. If the answer is no, there is little reason to treat the shares differently simply because they came through your compensation package. This is a useful starting point, but the tax cost of selling highly appreciated shares can make the answer different from what it would be with fresh cash.
Withholding Is Not the Same as Your Tax Bill
The 30 percent in the example above is an illustration, and the amount actually withheld may be lower than what you ultimately owe.
Federal income tax on supplemental wages like RSU income is commonly withheld at a flat 22% on the first $1M earned in a year and 37% above that, plus Social Security and Medicare and any applicable state withholding.
For a high earner whose actual marginal federal rate is 32, 35 or 37 percent, the flat 22% can leave a gap. You may discover at tax time that a large RSU vest left you with a balance due.
If you have significant vests, it is worth estimating your actual liability during the year and adjusting your paycheck withholding or making estimated payments, so the bill is not a surprise. The same issue applies to NQSO exercises.
The Tax Basis of Your RSUs Matters
Using the previous example, your basis in the 700 remaining shares is the value at vest, or $100 per share: approximately $70,000. This is because you already paid tax on that value as compensation income. If you immediately sell the shares for $100 per share, there may be little or no additional capital gain.
Now suppose you hold the shares for several years and the stock rises to $150. Your shares are now worth $105,000. The $35,000 of appreciation above the ~$70,000 basis is a capital gain. The holding period for that gain begins at vest, and if you hold for more than one year, the appreciation would qualify for long term capital gains treatment. Depending on your income, that can mean the 15% or 20% long term rate, and higher earners may also owe the 3.8% Net Investment Income Tax.
Holding the shares for more than one year does not turn the original RSU compensation into long term capital gain. The value of the shares at vesting was already recognized as ordinary compensation income. Only the subsequent appreciation is potentially subject to capital gains treatment.
That can still be meaningful, particularly for a highly appreciated position, but the potential tax savings should be weighed against the investment risk you are taking to obtain them. If you have $100,000 of vested employer stock and it rises to $120,000, the potential tax benefit applies to the $20,000 of appreciation, not the original $100,000. Meanwhile, the entire $100,000 remained exposed to the performance of one company.
Check Your Cost Basis Reporting
There is also a practical trap. Brokerage statements and Form 1099-B do not always report RSU basis correctly. Sometimes the basis appears as $0, or reflects only the net shares rather than the value at vest. If the reported basis is wrong and you do not correct it on your return, you can end up paying tax on the same income twice, once as compensation and again as capital gain. Keep your vest records and compare them against your 1099-B before filing. I wrote a full article on this topic, which you can read here: https://www.linkedin.com/pulse/selling-company-stock-make-sure-your-1099-b-does-you-dustin-lsfge
The Bigger Issue Is Often Concentration
For many employees, the more important question over the tax treatment is concentration risk.
Consider an employee who has $500,000 in retirement accounts, $200,000 in a diversified brokerage account and $300,000 of employer stock. The employer stock represents 30% of their $1M investment portfolio. Many planners use a rule of thumb (which I strongly dislike) somewhere in the range of 10-15% for any single stock, though there is no universal threshold, so 30% is a meaningful concentration.
But now consider the rest of the employee's financial picture. Suppose they earn $350,000 per year from the same company and expect another $500,000 of RSUs to vest over the next several years. Their exposure to the company is much larger than the $300,000 position suggests.
If the stock declines substantially, the value of their existing shares falls at the same time their future equity compensation becomes less valuable. If the decline reflects serious problems within the company, there could also be consequences for compensation, employment or career opportunities. Your paycheck, future grants, and job prospects are a form of human capital, and are already tied to the company. Adding a large investment in the same company increases the impact of its performance on your overall financial life.
That does not mean employer stock should never be a significant part of your portfolio. Someone with substantial assets outside the company may be comfortable with a larger position. Someone with relatively little invested outside the company may not be. The question is whether the concentration is intentional.
NQSOs Create an Additional Decision
Non-qualified stock options require a slightly different analysis, as you don’t own the shares simply because you have the options.
An NQSO gives you the right to purchase shares at a predetermined exercise price. The value of the option comes from the difference between what the shares are worth and what you are allowed to pay for them, subject to the terms of the option.
For the examples below, suppose you have 5,000 NQSOs with an exercise price of $25 per share, and the stock is currently worth $75 per share.
Exercise cost: 5,000 × $25 = $125,000*
Value of the shares: 5,000 × $75 = $375,000
Spread (intrinsic value): $250,000
For illustration, I will assume a combined federal, payroll, and state tax rate of 40% on the spread, which is $100,000. Your actual rate will differ.
*You Do Not Need $125,000 in Cash: It is important to understand that exercising does not necessarily require $125,000 sitting in your bank account. For publicly traded companies, employees frequently use a cashless exercise, in which the shares themselves provide the source of funds.
NQSO Exercise Creates Ordinary Income
For most NQSOs, the difference between the fair market value of the stock when the option is exercised and the exercise price is treated as ordinary compensation income. In the example, that $250,000 spread is ordinary income. This is true even if you do not sell the shares.
That distinction is extremely important when evaluating an exercise-and-hold strategy. Exercising and holding is not a way to defer the ordinary income associated with the exercise. You pay the tax on the spread and then choose to remain invested in the company. (Incentive stock options, or ISOs, are treated differently. They can allow you to defer regular tax, though the alternative minimum tax may apply. This article focuses on NQSOs.)
As with RSUs, withholding at exercise may fall short of your actual liability.
After exercise, your holding period for any shares you keep begins on the exercise date, and your basis is the fair market value at exercise.
Exercise and Sell Versus Exercise and Hold
If you exercise and immediately sell, you are monetizing the value of the option. The exercise price and taxes are covered by the transaction, and you receive the remaining value in cash.
If you exercise and hold, you made a much larger investment decision. You took an option with built in value, paid the tax on the spread, and chose to keep owning the stock.
Suppose you exercise and hold all 5,000 shares, funding the $225,000 of exercise cost and taxes from other cash. If the stock falls from $75 to $50, your shares fall from $375,000 to $250,000. If you had used sell to cover and kept 2,000 shares, those shares would fall from $150,000 to $100,000. The fact that the shares came from options does not protect you from a decline.
This is why an exercise and hold strategy should be viewed as an investment decision, not an equity compensation decision.
Other Considerations
The Same Day Sale Can Be a Powerful Tool
For employees of public companies, a full same day sale can simplify the decision. It allows you to capture the economic value of the options without taking on additional market risk.
This can be attractive for employees who already have substantial exposure to their employer through RSUs, existing shares or future equity grants. Imagine an employee who already owns $400,000 of employer stock, expects another $600,000 of RSUs to vest over the next several years, and holds 5,000 NQSOs with a substantial spread. Exercising and selling provides liquidity without adding another large block of employer stock. Exercising and holding would increase the concentration.
Expiration and Leaving the Company
Unexercised options carry their own risks. They have an expiration date, and options that are underwater (with the stock below the exercise price) can expire worthless. Many plans also shorten the exercise window after you leave the company, often to as little as 90 days, and the terms can vary depending on the reason for departure. If you are considering a job change, review your option agreements before you give notice, because a departure can force an exercise decision on a timeline you did not choose.
What If You Believe the Stock Is Going Higher?
Suppose you work for a company you believe has excellent long term prospects. You understand the business better than most investors because you work there, and you expect the stock to appreciate substantially.
Those beliefs may be completely reasonable. But there is a difference between believing a company will perform well and deciding that you want a large percentage of your personal wealth invested in that company. You can believe the stock is going to increase and still decide that you already have enough exposure.
The reverse is also true. You can decide to hold without believing the stock is certain to appreciate, if you have enough assets elsewhere that you are comfortable accepting the risk.
Selling Does Not Mean You Think the Company Will Fail
Employees can develop an emotional attachment to their employer's stock, and selling can feel like giving up on the company. But selling is not necessarily a prediction about the stock.
There is an important difference between saying "I think this stock is going down" and saying "I do not want 30 percent of my net worth dependent on this one company."
You Do Not Have to Sell Everything
There is no requirement to choose between holding every share and selling every share. An employee may keep a portion of their employer stock while systematically selling the rest.
For example, someone might sell newly vested RSUs while retaining shares from previous grants. Another might set a target allocation and periodically sell whenever the position grows beyond it.
There is no universal number. What matters is having a reason for the amount you hold. Someone with $2M of investable assets and $300,000 of employer stock may view that position very differently from someone with $10M of diversified investments and the same $300,000 position. The stock has not changed, the surrounding circumstances have.
Trading Windows and Trading Plans
If you work for a public company, you may not be able to sell whenever you like. Many companies restrict trading to open windows and prohibit it during blackout periods, and employees who hold material non-public information cannot trade at all. Officers and other insiders often face additional restrictions and reporting requirements.
Taxes Still Matter When You Sell
If you have held RSU shares for several years and the stock has appreciated significantly, the shares may have substantial unrealized capital gains. Selling everything at once could create a tax liability.
That does not automatically mean you should continue holding. It means the tax cost should be incorporated into the decision. Sometimes the most appropriate approach is to sell gradually. In other situations, there may be a reason to sell particular tax lots first: shares with losses, shares with smaller gains, and shares that have met the long term holding period all have different consequences.
A common mistake is to let taxes become the only reason for holding a concentrated position. Avoiding a capital gains tax today is not necessarily worth taking more investment risk than your financial plan can tolerate.
What Are You Going to Do With the Proceeds?
Selling employer stock is not automatically beneficial if the proceeds just move into another concentrated investment. The important question is what the proceeds accomplish.
Maybe you are building a diversified portfolio, increasing retirement savings, setting aside money for a home purchase, paying down debt, or building a cash reserve because your compensation is heavily dependent on equity. The decision becomes easier to evaluate when the alternative use of the money is clear. Every dollar you keep invested in your employer is a dollar that cannot be invested somewhere else.
Your Equity Strategy Should Change as Your Financial Picture Changes
The strategy you choose today does not have to stay the same for the next ten years. Early in your career, you may have relatively few assets outside of your employer and a large amount of future compensation ahead of you. Later, you may have accumulated significant wealth and have a much larger percentage of your net worth tied to the company.
The stock can also change the equation by appreciating. A $100,000 position that represents 10 percent of your portfolio can become a $200,000 position that represents 20 percent without you purchasing another share. Doing nothing is still a decision, and as your wealth grows, your equity compensation strategy may need to evolve with it.
The Question I Would Start With
There is no universal answer to whether you should hold or sell your RSUs or NQSOs.
For RSUs, the first decision generally comes after the shares vest and taxes have been withheld. At that point, the shares are an investment, and you can sell them, hold them, or sell a portion.
For NQSOs, there are more moving pieces: the exercise price, current stock price, expiration date, tax consequences, the way the exercise is funded, and whether you keep any of the shares afterward.
Ultimately, I think the most useful question is this: If I were given the after-tax cash value of this equity today, would I choose to invest that money in my employer's stock?
If the answer is yes, holding some or all of the shares may make sense. If the answer is no, it is worth asking why you are continuing to hold them simply because they came from your employer. Your answer may also change depending on how much you already own, how much more you expect to receive, and what percentage of your overall financial life is tied to the company.
Equity compensation can be an incredible wealth-building tool. But the goal is not to accumulate as much employer stock as possible, it is to use the value it creates to accomplish the things that matter to you financially. Sometimes that means holding the stock, sometimes selling it, and sometimes something in between.
This material is purely intended to be general and educational in nature, and should not be construed as specifically-tailored investment, financial planning, tax, legal, or other professional advice. Information and data contained herein is as-of the date of publication, and may be subject to change in the future without notice. Any investment performance referenced is purely past performance, which is no guarantee of any future performance. Nothing contained herein should be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation of any security or other financial product or investment strategy. All investment, tax, and financial planning strategies involve risk that you should be prepared to bear. You are highly encouraged to consult with professionals of your choosing before taking any action based on this material.