Capital Gains Tax 101
Taxes are not exactly anyone’s favorite subject, but understanding how the capital gains tax works can save you from big surprises. Whether you are selling company stock, cashing in on an Employee Stock Purchase Plan (ESPP), or thinking about liquidating some investments, knowing the basics will help you make smarter choices.
If you are in tech, chances are a good chunk of your wealth is tied up in equity. That is exciting, but it also means the tax side of things can feel more complicated. This post will focus on federal capital gains taxes, which are the rules that apply across the United States. Keep in mind that state taxes can vary. For example, California taxes capital gains as regular income and does not offer lower rates for long-term gains.
In this post, you will learn what capital gains tax is, the difference between short and long-term gains, common scenarios for tech employees, and practical strategies to reduce the impact of taxes on your investments.
What is Capital Gains Tax?
Capital gains tax is simply the tax you pay when you sell something for more than you bought it.
Capital Gain = Sale Price – Purchase Price (your “cost basis”)
Capital Loss = Sale Price lower than Purchase Price
Example (for illustration only): You buy stock for $20,000 and sell it later for $35,000. The $15,000 difference is your gain. That gain may be subject to tax.
Here is what is important to remember:
You only pay tax when you sell. Holding does not trigger a tax bill.
Losses can sometimes offset gains, helping lower your overall tax liability.
Thinking about selling your stock?
Don’t go it alone. A strategic approach can help you minimize taxes, maximize gains, and make confident decisions about your equity. Whether it’s RSUs, ISOs, or ESPPs, we can help you:
Understand your current tax exposure and potential capital gains.
Determine the optimal timing for selling shares.
Use strategies to reduce your tax burden and keep more of your wealth.
Coordinate your stock sales with your broader financial plan.
Schedule a personalized consultation today and turn your equity into smarter, tax-efficient growth.
Short-Term vs. Long-Term: Why Timing Matters
One of the biggest factors that determines how much you pay in capital gains tax is how long you have held your investment. The IRS separates gains into two categories:
Short-Term Gains
Assets held less than one year
Taxed at your ordinary income rate (the same rate as your salary or bonus)
For high earners, that rate can be as high as 37%
Long-Term Gains
Assets held more than one year
Taxed at lower rates: 0%, 15%, or 20%, depending on your income
This difference can be significant. The highest short-term rate (37%) is about 17% higher than the top long-term rate (20%). In other words, holding an investment just a few months longer can make a meaningful difference in your after-tax returns.
The tradeoff is that waiting comes with its own risks. Holding longer may help you qualify for lower tax rates, but it also leaves you exposed to market ups and downs. Finding the right balance between timing and risk is an important part of your overall financial plan.
Special Considerations for Tech Employees
If you are in tech, your compensation often includes stock, making understanding capital gains tax especially important. Different forms of equity are taxed in different ways once you sell:
Restricted Stock Units (RSUs)
RSUs are taxed as ordinary income when they vest.
Any growth after vesting is subject to capital gains tax when you sell the shares.
Incentive Stock Options (ISOs)
If you meet the holding requirements, the profit from exercising and selling ISOs may qualify for long-term capital gains tax rates.
However, exercising ISOs can also trigger the Alternative Minimum Tax (AMT), complicating the picture.
Employee Stock Purchase Plans (ESPPs)
The discount on shares is usually taxed as ordinary income, but the additional gain when you sell may qualify for long-term capital gains tax rates if you hold the shares long enough.
Upside: Equity can unlock favorable long-term capital gains rates if managed carefully.
Downside: Without planning, you could end up with more income taxed at higher short-term rates.
Ways to Manage Capital Gains Tax
You cannot avoid capital gains tax completely, but you can plan around it. Here are a few strategies many investors consider:
Hold longer to qualify for lower long-term rates.
Use tax-advantaged accounts like 401(k)s, IRAs, or HSAs to grow money tax-deferred or tax-free.
Offset gains with losses by selling underperforming investments.
Donate appreciated stock to eliminate the capital gains tax on those shares while supporting a cause.
Time your sales to spread out gains across tax years or avoid stacking them on top of a big bonus.
Why This Matters to You
Capital gains tax doesn’t have to be confusing or intimidating. By understanding the basics: what triggers the tax, the difference between short-term and long-term gains, and how your equity compensation is treated, you can make smarter decisions about when and how to sell. For tech professionals, where stock often makes up a significant portion of wealth, thoughtful planning can help reduce your tax burden and maximize the value of your investments.
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