From stock options to RSUs, an IPO is a momentous occasion — but it often comes with a large and unexpected tax bill. This article covers the tax implications for employees holding RSUs and ISOs when their company goes public.

Quick Summary

  • You won't owe taxes at the moment of IPO — but you will owe them when you file taxes the following year
  • RSU holders: the total value vested at IPO is treated as supplemental income, taxed at your regular income rate. Your company will withhold a portion, but it may not be enough.
  • ISO holders: exercising ISOs may trigger the Alternative Minimum Tax (AMT) — a separate tax system. Use our AMT Calculator to estimate your exposure.
  • Both: your total tax bill is a blend of the above

How Does an IPO Work From an Equity Perspective?

When you joined the company, you were likely offered equity alongside your salary — in the form of RSUs, ISOs, or both. That equity vests over time on a schedule, and an IPO is the event that makes it worth something real.

Leading up to the IPO, companies typically stop issuing new stock options in favor of RSUs, and begin finalizing their outstanding share count. You'll often receive communications about your IPO opening price — which is a key data point for estimating taxes.

RSU Taxes at IPO

RSUs are the simpler case. Every time an RSU vests, it's essentially your company giving you cash in the form of a share. Just like a salary or bonus, vested RSUs are supplemental income — they show up in Box 1 of your W2 and are subject to federal and state income tax.

What happens when RSUs vest?

The IRS requires employers to withhold at least 22% of supplemental income (including RSUs) for federal taxes. In practice, your company sells 22% of your vesting shares and keeps the proceeds to cover withholding. The remaining shares get deposited in your brokerage account.

If your effective tax rate is higher than 22% — which it often is for employees at companies going public — you'll owe additional taxes at filing time.

After your RSUs vest, the shares sitting in your brokerage are stocks like any other. You may also face short or long-term capital gains depending on how long you hold them and when you sell.

Why is IPO a big deal for RSU holders?

For employees who've been at a private company for years, RSUs have been accumulating without being worth anything real. At IPO, a large batch all become liquid at once. Even with the 22% withholding, the sheer volume of vesting shares — combined with a higher effective tax rate — can produce a surprise tax bill of $100,000 or more. Use our RSU Calculator to estimate your liability before it catches you off guard.

ISO Taxes at IPO

ISOs work very differently. When they vest, you don't receive shares — you receive the option to purchase shares at a predetermined price (your strike price). An IPO matters because it's the event that makes those options worth exercising.

In the weeks leading up to an IPO, employees with vested ISOs often rush to exercise — they want to start the holding period clock for a qualifying disposition, which leads to more favorable long-term capital gains treatment.

Unlike RSUs, exercising ISOs doesn't trigger regular income tax. Instead, it can trigger the Alternative Minimum Tax — a parallel tax system with its own rules, brackets, and exemptions. You only pay AMT if it exceeds your regular income tax, but ISO exercises are one of the most common triggers.

Does the IPO itself change the math for ISOs?

Not fundamentally. Your ISO tax liability is driven by the spread between your strike price and the FMV at exercise — regardless of whether the company is public or private. What the IPO changes is that the shares are now worth something liquid, making the decision to exercise feel more real.

The smartest move is to plan your exercise schedule in advance. Use the ISO Planner to see exactly how many options you can exercise in a given year without triggering AMT — and how much you'd save by spacing it out.