The Best Strategies for Selling Company Stock

Company stock options are an exciting perk. Selling those options is another story.  

In this article, we’ll cover two common types of stock options, walk through their tax implications, explore different approaches, and explain why holding options can be a risky approach.  

Before we can outline the best strategies though, it’s prudent to understand the mechanics of this equity compensation first.  

Stock Options Explained: Understanding Your Company Shares 

Stock options are an integral part of compensation packages, helping attract, motivate, and retain key talent. Receiving stock options is a strong sign that your company appreciates you and thinks you’re vital to its long-term success. 

In the simplest terms, stock options are a financial incentive that align employee and employer interests. They allow you to gain an ownership stake in your company, which means there’s a tangible financial benefit to working hard and contributing to your company’s performance.  

Stock options grant you the right to buy shares of your company at a set price, known as the strike price or exercise price, within a specified timeframe. But, as the name suggests, you are not obligated to any purchase.  

While this applies to Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NSOs), there are nuances to both. 

For instance, ISOs are only available to employees and can offer tax advantages under certain conditions. On the other hand, NSOs can be issued to employees, directors, contractors, and other pertinent parties, but they don’t provide the same tax benefits.  

Key Terms Explained 

• Grant Date: the date on which you receive your options. 

• Expiration Date: the date your options expire, typically 10 years after they’re granted. 

• Vesting: the schedule that dictates when you gain control of all the options granted.  

• • Cliff vesting: all at once after a certain period of time 

• • Graded vesting: a portion vests on a fixed schedule, perhaps every month or every quarter 

• • These elements can be combined. “Monthly vesting with a one-year cliff” means you wait 12 months for the first installment, and then additional options vest monthly thereafter. 

• Grant Price: the price per share you pay when you exercise stock options. This is typically set to the fair market value (FMV) of the underlying stock on the grant date. 

• Bargain Element: The spread between the FMV of the stock and your grant price. You are considered “in the money” if the FMV is greater than your grant price and “out of the money” if the FMV is lower.  

Why It’s Important to Understand How and When to Sell Stock Options 

When you’re selling any type of asset, there are financial implications—in the case of stock options, there are three notable ones: 

• Taxation: Stock options are taxed differently, depending on the type and holding period once exercised.  

• Withholdings: When selling stock options, your full tax liability is unlikely to be automatically withheld, which means proper planning is critical.  

• Risks: While stock options can be lucrative, they can also expose you to concentration risk.  

Consequently, financial planning can help you maximize your benefits. With this in mind, let’s explore the tax treatment of both types of stock options.  

How Stock Options Are Taxed 

Strategically timing the sale of your stock options can help reduce your tax bill and maximize net proceeds. It’s important to note, though, that exercising out-of-the-money options is generally not advisable, as that would suggest you’re paying more than what the underlying stock is worth.  

Tax Treatment of Non-Qualified Stock Options 

NSOs are simpler—there’s no special tax treatment or holding requirements. The trade-off is less favorable tax benefits.  

At exercise: The bargain element (the spread between the FMV and your grant price) is taxed as ordinary income.  

At sale: Proceeds are treated as either: 

• A short-term capital gain or loss if you hold the shares for less than a year.  

• A long-term capital gain or loss if you hold the shares a year or longer. This is generally a lower tax rate.  

If you sell your shares immediately upon exercising, there’s likely little to no change in stock price and, thus, negligible short-term capital gains.  

Example 

You hold 1,000 vested NSOs in ABC Corp, which were granted at $50 per share. 

One year later, ABC Corp is worth $75 per share on the secondary market. You’re ready to exercise your options but don’t have $50,000 in cash for a traditional conversion (1,000 shares x $50 grant price).  

So, you opt for a cashless exercise, selling enough shares immediately upon exercise at the current market valuation to cover the cost.   

This transaction generates $25,000 of ordinary income ($75,000 FMV – $50,000 grant), likely triggering a 22% tax withholding of $5,500. As a result, your proceeds are now $19,500. 

However, suppose you know you’re in the 32% marginal bracket. In that case, the 22% withholding might not cover your full tax liability, so you set aside an additional $2,500 to cover the anticipated shortfall. That brings your net proceeds to $17,000.  

Tax Treatment of Incentive Stock Options 

ISOs can provide tax advantages if you meet both of the following holding requirements for a qualifying disposition: 

• At least one year has passed since exercising the options. 

• At least two years have passed since the options were granted. 

For example, if shares were granted on September 1, 2024, and exercised on September 5, 2025, you must hold the shares until at least September 6, 2026, to qualify for preferred tax treatment. 

At exercise: Exercising ISOs does not typically trigger ordinary income tax on the bargain element. But this spread may be subject to the Alternative Minimum Tax (AMT), possibly adding a complicated wrinkle to your tax situation. 

At sale:  

• Qualifying Disposition: If you sell the shares after meeting the holding requirements, any gain is taxed as a long-term capital gain, which usually incurs a lower tax rate than ordinary income. 

• Disqualifying Disposition: Selling options prematurely disqualifies your transaction for preferential tax treatment, leading to a similar outcome to NSOs. The bargain element would be taxed as ordinary income, while the sale would trigger either short-term or long-term capital gain taxes, depending on the amount of time between exercise and sale.  

Example 

You have 1,000 vested ISOs in ABC Corp, which were granted at $50 per share on September 1, 2024. 

On September 5, 2025, ABC Corp is worth $75 per share. You decide to exercise your options. You can choose to sell at this time, as a disqualified disposition, netting the same outcome as our NSOs example. Or, you can purchase the shares with $50,000 cash. Note that cashless exercises are disqualifying dispositions.  

• If you choose a cashless exercise (a disqualifying disposition), you reach the same outcomes as the NSOs example 

• Alternatively, you can purchase the shares outright for $50,000. Waiting another year to meet the holding requirements, you sell your shares on September 6, 2026; for simplicity, we’ll assume the market price is still $75 per share. You proactively set aside $3,750 for taxes (long-term capital gains at 15%), resulting in net proceeds of $21,250. 

Understandably, you may not have $50,000 readily available to purchase shares. Moreover, while holding ISOs post-exercise can reduce your tax liability under favorable conditions, it also introduces significant risk.  

Stock prices can (and do) fluctuate — waiting to meet the qualifying disposition criteria might result in diminished returns or losses if the share price declines. 

Impact of Alternative Minimum Tax When Exercising ISOs 

As we’ve seen, ISOs can offer significant tax benefits (and potentially greater net proceeds) than NSOs — especially as the spread between your grant price and sale price widens.  

Unfortunately, the IRS is well aware, too. They require you to recognize the bargain element as income in your Alternative Minimum Tax calculation. 

What is AMT? 

Although most taxpayers file under the standard system each year, there's another calculation running in the background: the AMT. This functions almost like a shadow tax system that people don’t notice until it directly affects them.  

AMT recalculates your tax liability by adding back certain deductions and exemptions allowed under the regular tax system, including the income from exercising ISOs ($25,000 in our example). The intention is to prevent people from exploiting tax loopholes.  

Typically, you pay the higher of the two calculated taxes—standard or AMT. For most people, in most years, the standard calculation results in higher tax due. However, if your bargain element from ISOs is substantial, it might increase your taxable income enough to make AMT the higher tax, thereby triggering an unexpected liability in the year you exercise your options. 

AMT Credit 

If exercising ISOs causes you to pay AMT, you receive an AMT credit for your trouble. The AMT credit can be carried forward indefinitely to offset your standard tax liability in future years. It’s calculated as the difference between your AMT and regular tax amount. 

For example, you exercise ISOs in 2024. Your traditional tax is $100,000 and your AMT after exercising is $120,000:   

• You must pay $120,000 in 2024. 

• You receive an AMT credit of $20,000. You can apply this in a future year when your AMT is lower than your traditional tax. 

• In 2025, if your traditional tax is $90,000 and your AMT is $75,000, you can use $15,000 of your credit on the difference, effectively bringing your federal tax bill down to $75,000. 

• The unused credit — in this case, $5,000 — does not expire and can be applied toward a federal tax bill in a subsequent year. 

Should I Sell or Hold My Options? 4 Reasons to Sell 

Once your options have vested, you're faced with a difficult decision: sell or hold.  

Generally, we recommend selling your options (as well as other types of equity compensation) and investing the proceeds in a well-diversified portfolio, for several reasons:  

You’re heavily invested already. You dedicate 40 hours per week (possibly more) to your company. In exchange, you receive a salary, benefits, and perhaps bonuses, tethering much of your financial future to your employer’s success.  

Holding a substantial amount of your company’s stock doubles down on this investment, magnifying your financial risk if the business ever struggles. 

Any single stock is prone to volatility. Historical data from the last 40 years shows that 40% of all stocks listed in the Russell 3000 index have experienced a precipitous and permanent decline of 70% or more from their peak values.  

Furthermore, over the last 90 years, only 4% of stocks accounted for the entire excess return of US stocks over risk-free Treasury bills. Chances are, your company's stock isn't among that small percentile. 

There’s always downside risk. Even with insider knowledge of your company’s operations and strategic direction, there’s no guarantee that shares will appreciate.  

If you hold after exercising and the stock price plummets, you might find yourself in a position where the taxes owed on your options (or vested RSUs) are higher than what the stock is actually worth. 

You could lock in profits gradually. If your concern is potentially missing out on further gains, remember that employee stock options often come with a graded vesting schedule, which may allow you to sell parts of your holdings as they vest over time.  Or perhaps you’re entitled to new stock option grants each year.   

Thus, even if selling your shares immediately to capture the certain profit and reduce your exposure, you retain the upside possibility that your future vested options may be worth more. 

What’s the Right Exit Strategy for Your Stock Options? 

Both NSOs and ISOs are potentially lucrative forms of equity compensation. That said, there’s no one-size-fits-all strategy for selling company stock — it’s a subjective situation. Enlisting the help of a financial advisor can help: 

• Accurately account for taxes incurred by exercising stock options to avoid surprises at tax time. 

• Evaluate whether it’s advantageous to wait for a qualifying disposition on your ISOs, possibly reducing your tax burden. 

• Understand the AMT implications of your ISO exercise, especially if your stock appreciates dramatically by the time you exercise.  

• Develop a plan to reduce risk by unwinding a substantial concentration in your employer’s (or any company’s) stock.  

• Navigate the complexities of exercising stock options in a private company, which may depend on liquidity events (like the IPO of a startup). 

The “right” decision varies from person to person. If you have stock options, lean on the expertise of a wealth manager, who can develop and execute these strategies on your behalf.  

Plancorp offers comprehensive wealth management, with a specialty in helping those with higher incomes or access to equity compensation make the most of their opportunities. 

Curious to see the estimated net proceeds and tax treatments of a potential sale of your NSOs? Download our free calculator below to get started.