4 Costly Tax-Return Mistakes Tech Professionals Make with Equity Compensation

If you work in tech, then you very likely have equity compensation. Many times multiple different types of it (ISOs, NSOs, RSUs, ESPP.....)

BUT they have all sorts of odd nuances when it comes to taxes -- which has a big impact on both the strategic planning of what to do with it, and how to correctly file your taxes on it.

Using a CPA with knowledge of equity compensation will definitely help prevent many of the errors below. But your CPA needs to also know what you did to file correctly -- so your knowledge of these is important even if you work with a CPA (so you can tell them what you did).

At 30-40 Wealth Partners , we frequently review new clients past tax returns, and I've seen the four mistakes below collectively result in overpaying a LOT (it cost some clients more than $100,000). So here is a quick high level of each + what you need to know

Mistake #1: Incorrect Cost-Basis

The price you paid for your stock is your cost basis. In a brokerage account, things are easy (e.g. I bought 100 shares at $50.00, and Schwab lists my cost basis as $50.00).

But with equity comp things are reported very weird. Two common situations that perplex individuals are are:

(1) NSOs. Brokerage firms are required to the price you bought the shares at, which is your strike price. But if the fair market value (FMV) was above your strike when you bought, you (i) paid income tax on the difference, and (ii) for all intents and purposes your cost basis is now the FMV. But that's NOT how its shown at the brokerage, and if you don't adjust it, you will be double taxed

Quick Example. A few years ago, your company was pre-IPO, and you exercised 1000 NSOs. They had a $1.00 strike, and the FMV was $5.00. You owed income tax on the difference ($5-$! = $4 * 100 shares = $4000 of income), and your cost basis for became $5.00. A few years later your company is publicly traded, your shares are now on Schwab/ETrade/whatever.....and the cost basis is listed as $1.00 (instead of $5.00). This is what the IRS requires. Worse -- when you sell at $7.00, your broker is going to issue a 1099 tax doc that says you sold for a gain of $6 per share ($7 - $1). You have to know this is happening, and adjust the cost basis on your tax return for those shares to $5, so that the capital gain you owe tax on is correctly detailed as $2 per share ($7 - $5).

(2) RSUs. When RSUs vest, you are taxed on 100% of the vesting as income, and your cost basis is the price of the stock when it vested. Soooo....you would think that your broker would list that as their cost basis. Sometimes they do, sometimes they dont. In the "don't" cases, many times they leave it blank or list it as $0.

Quick Example. You vested 1,000 RSUs at $50 a share, which (i) generates $50,000 of income that you are taxed on, and (ii) your cost basis for those shares is $50. You sell the shares soon thereafter at $50 a share (no gain or loss). But your brokerage firm had the shares as a $0 basis. So, when they issue you a 1099 it shows a $50,000 gain on the sale. If you didn't know/correct, this, you would be taxed twice: (1) the $50,000 as income via a w-2 from your company, and (2) a $50,000 capital gain as detailed on your 1099! Again, you need to correct the cost basis on your tax return so that you are correctly taxed as (1) $50,000 of income, and (2) no capital gain.

Mistake #2: ISO Tax Reporting Pitfalls (AMT and Dual Basis)

Incentive Stock Options (ISOs) are the most tax-complex type of equity comp, as they can involve dual cost basis (regular tax and AMT), AMT tax payments, and an AMT credit to track for future recoup (at both federal level, and with some states). Multiple tax mistakes are common with ISOs. A few of the more frequent ones are:

Incorrectly reporting ISO exercises. If you exercise ISOs (where the FMV > your strike price), and hold the shares, there's no regular income tax due on the exercise (though AMT might be due). But some people report their ISOs as NSOs and incorrectly pay income tax on the exercise

Ignoring AMT. If you exercise ISOs (where the FMV > your strike price), while no income tax is due, you may owe AMT. The calculation is complex, but some individuals ignore this (and that is a big no-no)

Tracking paid AMT for future recoup. AMT is sometimes called a "prepayment tax", because if you pay AMT, you get a credit with the govt for the paid amount that you can recoup in future years. But sometimes individuals forget to list/track their AMT credit...giving away money

Dual cost basis. ISOs have two different bases: one for regular tax purposes (the exercise price) and a higher one for AMT purposes (exercise price plus the AMT income recognized). When you sell ISO shares later, your AMT gain is lower, which helps you recoup your AMT credit. But if you don't track/detail the dual cost basis, you will recoup a lot less in the year of sale, and likely extend out the timeline for full recoup by many years.

Mistake #3: Under-Withholding on RSUs and Surprise Tax Bills

This one comes up more frequently than I care to note. Here is the quick gist:

• RSU vesting is considered supplemental income, and the IRS has special rules for that -- specifically requiring only a 22% tax withholding rate

• But it's still income, and when you calculate your taxes, it is treated as such

• For most tech workers, their IRS marginal tax rate is 32% to 37%

• Which means: Your company withheld 22% for federal tax on your RSU vesting, but you owe 32-37%. So come April, you owe that 10-15% delta.

Possible solutions to this:

• If your company allows it, increase your tax withholding rate on your RSUs

• If they don't, make estimated tax payments each quarter

• At a bare minimum, at least mental KNOW you will very likely owe the IRS each April, so you are not surprised when you calculate your taxes and owe a big number

Mistake #4: ESPP Discount and Possible Double Taxation

Employee Stock Purchase Plans (ESPPs) frequently cause tax-reporting confusion, especially regarding the purchase discount. ESPPs typically allow buying company stock at a discount (often 15%), but that discount is taxable as ordinary income when you sell your shares in a disqualifying disposition (selling within two years from the offering date or one year from the purchase date).

Your employer reports this discount on your W-2, but your brokerage usually reports only your discounted purchase price as the cost basis.

If you fail to adjust your cost basis upwards (adding back the taxed discount), you'll mistakenly pay capital gains tax again on that same discount—essentially paying tax twice.

Tax Planning + Strategy Resource

Want to know more? The 30-40 Wealth Stock Comp Knowledge Base details how taxation works on every type of equity comp, including examples, as well as dives into the 50+ tax strategies that can apply to equity comp