Equity Compensation Planning: A Guide to ISOs, RSUs, and Concentrated Stock

There is a particular kind of quiet stress that comes with owning a lot of one stock. Picture someone who has spent fifteen years at a company in the Folsom tech corridor or the Bay Area. Their restricted stock units vested year after year, they exercised options along the way, and now a single ticker represents 40, 50, sometimes 70 percent of their net worth. They know the concentration is risky. They also know that selling triggers a very visible tax bill, while the risk of holding stays invisible right up until the day it isn't. So they wait, and the position keeps growing, and so do the stakes of every decision they are not making.

I know this one from the inside. I exercised incentive stock options after leaving my last company and ran the Alternative Minimum Tax math on my own numbers, on a deadline, with a valuation that would not sit still. None of what follows is theoretical to me.

That tension is what equity compensation planning exists to resolve, and none of it stands still. A vesting schedule keeps issuing new shares, a blackout window can close right when you want to trade, and one exercise decision can move you into the Alternative Minimum Tax before you have thought about April. What follows covers how ISOs, RSUs, and concentrated positions actually get taxed and planned around, with the current 2026 figures, the rules for 10b5-1 trading plans, and the approaches advisors commonly discuss for diversifying. It is educational only, not individual tax, legal, or investment advice, and every strategy here depends on your specific facts.

What is equity compensation planning

Equity compensation planning is the set of decisions around when to exercise options, when to sell vested shares, how to manage the resulting tax bill, and how much company stock to hold versus diversify away. Because equity awards come in several legal forms, each with its own tax treatment, the first step is usually just identifying what you actually hold.

Incentive stock options (ISOs) give you the right to buy company stock at a fixed exercise price, with potentially favorable tax treatment if you meet specific holding period rules. No regular income tax is due at exercise, but the spread between the exercise price and the stock's fair market value, known as the bargain element, can trigger the AMT in the year you exercise.

Non-qualified stock options (NSOs) work more simply. The bargain element at exercise is taxed as ordinary income immediately, with payroll withholding, and there is no AMT wrinkle. NSOs can be granted to employees, contractors, and board members alike, while ISOs may only be granted to employees.

Restricted stock units (RSUs) are a promise to deliver shares once vesting conditions are met, most commonly a service period and sometimes performance conditions as well. There is no exercise price and no AMT exposure, but the full value of the shares becomes ordinary income at vesting.

Concentrated stock describes any position, whether built from options, RSUs, an employee stock purchase plan, or simply years of holding, that makes up a large share of your net worth. Concentration is not a tax concept, it is a portfolio risk concept, and employees who hold a large amount of employer stock are effectively exposed to the same company twice, once through their paycheck and once through their portfolio.

Because these instruments interact, a plan built around just one of them, say optimizing ISO timing while ignoring RSUs vesting the same year, tends to work less well than a plan that considers all of it together. For the two situations we see most, the pre-retiree with decades of accumulated employer stock and the tech professional coming out of an IPO or acquisition, the question is rarely whether to diversify. It is how fast, in what order, and at what tax cost.

ISO exercise timing and AMT

When you exercise an ISO and hold the shares rather than selling immediately, the bargain element is added to your alternative minimum taxable income on IRS Form 6251, even though it is not included in regular taxable income and you received no cash. If the AMT calculated on that broader income base exceeds your regular tax, you owe the difference. Exercise a large block in a high-flying year and you could owe a six-figure tax bill on paper gains, and if the stock then falls, you may have paid real tax on value that no longer exists.

The 2026 rules make this modeling more important, not less. Under the One Big Beautiful Bill Act, the AMT exemption phaseout thresholds dropped to $500,000 for single filers and $1,000,000 for joint filers, and the phaseout rate doubled to 50 cents per dollar. For comparison, the 2025 phaseout did not begin until $626,350 single and $1,252,700 joint, and eroded at half the speed. Here are the key 2026 figures from IRS Revenue Procedure 2025-32:

Married filing jointly. Under 2026 rules the exemption is fully phased out at roughly $1.28 million of AMTI, versus roughly $1.8 million under 2025 rules. Source: IRS Rev. Proc. 2024-40 and Rev. Proc. 2025-32.

The $100,000 rule. ISOs are also capped by a rule that limits how much grant-date value can become exercisable for the first time in a single calendar year and still qualify for ISO treatment. Any amount above $100,000 that first becomes exercisable in a year is generally treated as an NSO instead, with ordinary income tax due at exercise. Employees with several years of overlapping grants may want to check this limit before assuming every option in a vesting tranche is actually an ISO.

Qualifying versus disqualifying dispositions. Selling ISO shares more than two years after the grant date and more than one year after the exercise date is a qualifying disposition, and the gain above your exercise price could be taxed at long-term capital gains rates with no ordinary income component (IRS Topic 427 covers the mechanics). Selling before meeting both holding periods is a disqualifying disposition, which can convert some or all of the gain into ordinary income. Exercising and selling in the same calendar year avoids the AMT adjustment entirely, because the bargain element is taxed as ordinary income instead, but it also gives up the long-term capital gains treatment a qualifying disposition could have produced.

The practical playbook, then: spread exercises across years, sized to stay under your AMT crossover point, favor years when other income is lower, and track any AMT credit carryforward, which may return some prior AMT paid through Form 8801 once regular tax exceeds AMT. These approaches could reduce, though not eliminate, the tax cost of exercising. Some people also find that exercising early in a calendar year adds flexibility, because if the stock falls sharply before December, a disqualifying sale before year-end may unwind the AMT exposure on those shares. The right sequence depends on the size of the grant, your other income, and your state of residence.

RSU vesting and sale strategies

RSUs are simpler than options in one way and sneakier in another. The simple part: on the date your RSUs vest, the fair market value of the shares is added to your W-2 as ordinary wage income per IRS Publication 525, subject to income tax withholding plus Social Security and Medicare tax, the same as any other paycheck. There is no exercise decision, no AMT preference item, and no 83(b) election available the way there is for restricted stock awards.

The sneaky part is withholding. Employers generally withhold RSU income at the flat supplemental wage rate per IRS Publication 15, which is 22 percent on supplemental wages up to $1 million in a calendar year and 37 percent above that. For someone whose total income lands in the 32, 35, or 37 percent brackets, and in 2026 the 37 percent bracket begins at $640,600 for single filers and $768,700 for joint filers, the gap between what was withheld and what is owed can produce a balance due and potentially an underpayment penalty at filing time. Large vest years, especially IPO lockup expirations where multiple tranches vest at once, deserve a mid-year tax projection, not an April surprise.

Cost basis resets at vesting. Because the vesting-date value is already taxed as ordinary income, your cost basis becomes that same value, and only price movement after vesting produces a capital gain or loss when you sell. The capital gains holding clock also starts fresh at vesting, not at grant, so shares generally must be held more than one year past the vest date for the post-vesting appreciation to qualify for long-term rates, a topic we covered in our guide to capital gains tax planning in California, including why California taxes gains at ordinary rates with no preferential treatment.

Sell at vest versus hold. One framing tends to clarify the decision. Because RSUs are already taxed at vest, holding the shares afterward is economically similar to receiving a cash bonus and choosing to buy your employer's stock with it. Would you do that deliberately, on top of the salary, future grants, and career capital you already have tied to the same company? For some people the answer is yes in moderation. For many, selling at or near vest, sometimes through an automatic sell-to-cover or same-day sale instruction, is the cleaner default, since basis equals vest-date value and an immediate sale generally produces little additional gain. Holding instead is a fresh investment decision worth making deliberately rather than by default.

10b5-1 trading plans

If you are a director, officer, or employee with regular access to material nonpublic information, trading windows and blackout periods can make diversification feel impossible. Rule 10b5-1 trading plans exist for exactly this problem. A 10b5-1 plan is a written instruction, adopted with a broker, that specifies in advance the amount, price, and timing of future trades, or a formula for determining them. Trading under a properly adopted plan provides an affirmative defense against insider trading liability, not blanket immunity, because it shows the trades were pre-committed before the person could have acted on any inside information.

Timing of adoption matters most. A plan must be entered into in good faith, at a time when the adopting person is not aware of material nonpublic information, and it cannot be adopted opportunistically around a blackout window with that knowledge already in hand. The Securities and Exchange Commission (SEC) tightened the rules in amendments effective 2023, and per the SEC's fact sheet on the amended rule, directors and officers face a cooling-off period running to the later of 90 days after adopting or modifying a plan or two business days after the company files the quarterly or annual report covering the quarter of adoption, capped at 120 days. Everyone else other than the issuer faces a 30-day cooling-off period. Directors and officers must also certify at adoption that they are unaware of material nonpublic information and are acting in good faith.

Structural limits. Overlapping plans for open-market trades in the same securities are generally prohibited, which is meant to prevent someone from cancelling an inconvenient plan while a more favorable one quietly runs underneath it, and single-trade plans are generally limited to one per 12-month period. Companies must now disclose insider plan adoptions and terminations in their periodic reports.

For an executive or founder holding a large, restricted-by-policy position, a 10b5-1 plan is often the only realistic path to systematic diversification. And the cooling-off period is the whole ballgame for planning, because a timeline that depends on a plan has to be set in motion a quarter or more before the first intended sale, and modifications restart the clock. Setting one up is a compliance decision as much as a financial one, typically coordinated among you, the company's legal or compliance team, and your own advisors.

Diversifying concentrated stock positions

A common rule of thumb holds that once a single stock exceeds 10 to 20 percent of your investable assets, concentration stops riding along in the portfolio and starts driving it. A single company's business results, management decisions, and stock price can move sharply for reasons that have nothing to do with the broader market, and that risk sits on top of a paycheck that already depends on the same company. People are often reluctant to sell shares in a company they helped build, and there can be genuine tax and behavioral reasons behind that reluctance. Nobody is asking you to abandon a stock you believe in. The job is making sure one company's bad decade cannot rewrite your retirement.

Staged selling. Most plans start with the least exotic tool, selling across multiple tax years in slices sized against the capital gains brackets, particularly for a low-basis position where most of the proceeds would otherwise be taxed as gain in a single year. For 2026, long-term capital gains are taxed at 0 percent up to $49,450 of taxable income for single filers ($98,900 joint), 15 percent up to $545,500 ($613,700 joint), and 20 percent above that, with an additional 3.8 percent Net Investment Income Tax once modified adjusted gross income exceeds $200,000 single or $250,000 joint. Spreading sales may keep more of each gain in the 15 percent tier, and a 10b5-1 plan is one common vehicle for staging sales for an insider who is otherwise restricted.

Hypothetical example, married filing jointly with $150,000 of other taxable income each year, a $1.2 million long-term gain sold in one year versus four equal annual stages, 2026 federal brackets held constant, federal tax only, excludes state tax. This example is illustrative, does not describe any actual client, and does not guarantee any outcome. Source: IRS Rev. Proc. 2025-32 thresholds.

Coordinating with the rest of the tax picture. Selling appreciated stock competes for the same bracket space as every other income event in the same year, including an ISO exercise, an RSU vesting cliff, or a Roth conversion. A year with a large liquidity event is often not the year to also convert retirement assets, while a lower-income year, such as the gap after leaving a company, may be a better year to sell stock, exercise options, or run the kind of moves described in our Roth conversion strategy guide. Getting equity events, capital gains, and retirement account strategy onto the same calendar is where a coordinated plan earns its keep.

Other approaches worth understanding. Donating appreciated shares held more than one year directly to a qualified charity or donor-advised fund may allow a deduction for full market value while avoiding the capital gain entirely, subject to the usual adjusted gross income deduction limits, which makes highly appreciated employer stock one of the most tax-effective assets to give. Tax-loss harvesting elsewhere in the portfolio can offset a portion of the recognized gain in the same year. For very large positions, exchange funds and hedging strategies such as protective options exist, but the costs, lockups, eligibility hurdles, and risks make them tools for specific situations, not defaults, and they should only be evaluated with qualified tax and legal advisors.

None of these approaches make concentration risk or the tax bill disappear, and no advisor can guarantee a specific tax result. What a coordinated plan can generally do is sequence the available tools in an order that fits your basis, income trajectory, insider status, and honestly, your relationship with the stock. This is the work we do with the concentrated stock pre-retirees and post-liquidity tech professionals we serve, often alongside broader tax planning. As a fee-only fiduciary, Up Capital Management is compensated only by our clients, never by commissions or products tied to any strategy, which matters on a decision where the size and timing of a sale can move a meaningful amount of money. The stock funded the life. The plan is what protects it.

See how these strategies fit your actual grants If you are holding concentrated stock or staring down a vesting schedule and want a plan built around your actual numbers and your actual timeline, that is exactly the conversation we have. No pitch, just clarity. Schedule a consultation →

Sources

• IRS Revenue Procedure 2025-32 (2026 inflation adjustments): https://www.irs.gov/pub/irs-drop/rp-25-32.pdf
• Tax Foundation, 2026 Tax Brackets and Federal Income Tax Rates: https://taxfoundation.org/data/all/federal/2026-tax-brackets/
• IRS Instructions for Form 6251, Alternative Minimum Tax: https://www.irs.gov/instructions/i6251
• IRS Topic 427, Stock Options: https://www.irs.gov/taxtopics/tc427
• IRS Publication 525, Taxable and Nontaxable Income: https://www.irs.gov/publications/p525
• IRS Publication 15, Employer's Tax Guide: https://www.irs.gov/publications/p15
• IRS, Net Investment Income Tax: https://www.irs.gov/individuals/net-investment-income-tax
• IRS, About Form 8801 (AMT credit): https://www.irs.gov/forms-pubs/about-form-8801
• SEC Fact Sheet, Rule 10b5-1 and Insider Trading Arrangements: https://www.sec.gov/files/33-11138-fact-sheet.pdf

[Disclosure below adopted from WealthReach draft. CCO to confirm exact language before publication.] Advisory services offered through Up Capital Management, Inc., an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training. This material is for informational and educational purposes only, reflects the opinions of the author as of the publication date, and is subject to change without notice. It does not constitute individualized tax, legal, or investment advice, and no portion should be relied upon as a recommendation for any specific person. Alternative minimum tax, capital gains, and other figures cited reflect the guidance sourced and dated above and are subject to legislative and regulatory change. Rule 10b5-1 trading plans involve requirements administered by each individual's employer and broker in addition to SEC rules, and this article does not describe every requirement that may apply to a given plan. No specific tax outcome, reduction in tax liability, or investment result is guaranteed. Diversification does not ensure a profit or protect against loss in a declining market. Examples are hypothetical and do not describe any actual client. Consult a qualified tax professional, and your company's legal or compliance team where applicable, before implementing any strategy discussed here. Past performance is not indicative of future results.

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