The short version
An initial public offering (IPO) is a company’s first public offering of its shares. For an employee, it can also bring several decisions close together: an option exercise, delivery of restricted stock units, a share sale, and a tax payment. The tax plan should identify which events actually apply to your awards, when the resulting income arises, and whether you can access enough cash to pay the bill.
An expected IPO date does not answer those questions. A useful review starts with your grant agreements and a household tax projection before you make an exercise or sale commitment.
What the law actually says
Internal Revenue Code section 83 governs many transfers of property for services. The ordinary compensation amount is generally the property’s value, less what you paid, when the property first becomes transferable or is no longer subject to a substantial risk of forfeiture. An applicable election or another statutory rule can change that result. Going public is not a universal replacement for those rules.
An employee’s awards therefore need to be separated by type. For a nonstatutory option without a readily ascertainable value when granted, Treasury Regulation 1.83-7 generally applies section 83 when the option is exercised or otherwise disposed of. If the acquired shares are fully vested, the exercise spread normally becomes compensation then, even if a sale comes later.
An incentive stock option (ISO) follows a different framework. Section 422 sets the qualification and holding requirements. Exercise can avoid current regular income tax while still producing an adjustment under the alternative minimum tax (AMT), a separate tax calculation. Section 56(b)(3) makes that exercise-year review necessary. Selling before the required holding periods expire can change the regular-tax result.
A restricted stock unit (RSU) is a promise to deliver stock or cash under an award, rather than necessarily a present transfer of stock. An unfunded, unsecured promise is not property under Treasury Regulation 1.83-3(e). The agreement’s vesting and settlement provisions, together with the deferred-compensation rules in Treasury Regulation 1.409A-1, need review. If an award requires both service and a liquidity event, the exact wording matters; the phrase “double trigger” alone is not a tax conclusion.
How a pre-IPO review works
Sheepdog Tax organizes the analysis around three dates for each award: when an action becomes available, when income is recognized, and when cash can actually be obtained. Grant notices, amendments, exercise confirmations, payroll statements, and the company’s sale restrictions establish those dates. A valuation in an employee dashboard does not establish that you can sell the displayed balance.
The Securities and Exchange Commission’s IPO investor bulletin explains that employee shares may remain subject to resale restrictions or contractual lockups after the offering. The actual agreement controls the practical sale timetable. Securities counsel or the company’s compliance function should resolve whether a proposed sale is permitted; the tax projection does not grant trading permission.
Consider a hypothetical employee who exercises 2,000 vested nonstatutory options at $5 per share when the shares are worth $30. Assume the options had no readily ascertainable value at grant, no special deferral applies, and there are no fees. The exercise requires $10,000 and produces $50,000 of compensation: 2,000 multiplied by the $25 spread. It does not produce $50,000 of spendable cash.
If those shares later sell for $32 each, the proceeds are $64,000. IRS Publication 525, under Nonstatutory Stock Options and Sale of the stock, explains that basis includes the exercise price and compensation included in income. Here that is $10,000 plus $50,000, or $60,000 of tax basis, the amount used to measure sale gain or loss. The later gain is $4,000 before selling costs. That gain’s holding period is a separate question. The exercise-year income does not disappear if the stock price falls before a sale.
The comparison should also show a smaller exercise and no exercise, including the resulting cash reserve and the risk of holding concentrated employer shares. These are scenarios for a decision, not a prediction of the IPO price or a recommendation to exercise.
Dates and percentages that need separate treatment
Scroll the table sideways to read all columns, including sources.
| Item | Rule or figure | Authority |
|---|---|---|
| Election for eligible transferred restricted stock | Section 83(b) election generally must be made no later than 30 days after transfer | Section 83(b)(2) |
| ISO qualifying disposition | No disposition within 2 years after grant or within 1 year after transfer of the shares | Section 422(a)(1) |
| Ordinary long-term capital-gain holding rule | Capital asset held for more than 1 year, subject to applicable special rules | Section 1222(3) |
| Optional flat federal supplemental-wage withholding | 22%, when the employer can use that method | Publication 15 (2026), section 7 |
| Supplemental wages above the annual threshold | 37% mandatory federal withholding on the portion over $1 million, counting commonly controlled employers | Publication 15 (2026), section 7 |
These are different rules, not interchangeable targets. The section 83(b) election does not apply to an RSU promise, and an IPO does not restart an earlier election deadline. Supplemental-wage withholding is a payment toward tax, not a statement of your final tax rate. The employer’s available withholding method and the employee’s ultimate liability need separate calculations.
What the plan should deliver
A useful projection reconciles compensation, potential sale gain, exercise costs, withholding, estimated payments, and the cash left after projected tax. Publication 505 (2026) explains estimated-tax requirements and the annualized-income method for uneven income. Satisfying a payment benchmark can address an underpayment penalty without fully paying the eventual return balance.
Past work locations also belong in the file. The analysis in One Stock Option, Two Sourcing Periods shows why a federal compensation allocation and California’s allocation can use different periods. Its specific nonstatutory-option example should not be copied onto every award. A move before the IPO requires an award-specific state review.
Related reading
The Nomad Audit File discusses organizing travel, residence, and income evidence when international work is involved. Those records can support the facts behind an equity review; the article does not establish the tax treatment of your particular stock award. The option-sourcing article linked above provides a focused example of how work history affects the analysis.
How Sheepdog Tax can help
Email noah@sheepdogtax.com with your award type and the upcoming exercise, settlement, or sale decision. Sheepdog Tax can discuss a review of the award documents, tax scenarios, payment needs, and records needed for the eventual return. Sensitive award and financial documents should be exchanged through the agreed intake process.
Sheepdog Tax is a veteran-owned practice led by Noah Green, Certified Public Accountant (CPA) and Certified Fraud Examiner (CFE). The work is tailored to the engagement and your facts. No tax result, share price, or access to liquidity is guaranteed.
Sources
- Internal Revenue Code section 83, property transferred for services, elections, and RSU limitation.
- Treasury Regulation 1.83-7, nonqualified stock options.
- Internal Revenue Code section 422, incentive stock options.
- Internal Revenue Code section 56, paragraph (b)(3), ISO treatment for alternative minimum tax.
- Treasury Regulation 1.83-3, paragraph (e), property and unfunded promises.
- Treasury Regulation 1.409A-1, deferred-compensation definitions and exclusions.
- IRS Publication 525 (2025), Nonstatutory Stock Options and Sale of the stock.
- Internal Revenue Code section 1222, capital-gain holding periods.
- IRS Publication 15 (2026), section 7, supplemental wages.
- IRS Publication 505 (2026), estimated tax and annualized income.
- SEC, Updated Investor Bulletin: Investing in an IPO, employee-share restrictions and lockups.
Prepared by Noah Green, CPA, CFE.