How RSUs are taxed at an IPO
An IPO can detonate years of double-trigger RSUs into one tax year. The income stacks, the withholding falls short, and the bill arrives while the stock is still locked up.
RSUs · Taxation
When your company goes public, when do you actually owe tax on your RSUs? All at once, the moment the IPO satisfies the liquidity trigger. Every double-trigger unit that quietly cleared its time requirement over the past few years settles in a single quarter, and a career’s worth of income lands on one year’s tax return. That compression is the whole problem, and the timing makes it worse.
Why an IPO stacks the income
At a private company, your double-trigger RSUs needed two things to vest: time and a liquidity event. Year after year you cleared the time trigger, and nothing happened, because there was no liquidity. The IPO is the liquidity. The day it fires, the dam breaks.
Every unit waiting on that second trigger settles at once. The full value of all of them is ordinary income, taxed like salary, in the year the IPO closes. If those shares had vested smoothly at a public company, the income would have spread across several years and several brackets. Instead it piles into one. Same shares, far worse tax curve, purely because of timing.
The lockup makes the cash worse
Here is the second-order trap. You owe a giant tax bill the year of the IPO, but you usually cannot sell freely yet, because of a lockup, a stretch after the IPO when insiders are barred from selling. So you can owe real cash on shares you are not allowed to turn into cash.
Caution
Owing tax on stock you cannot sell is the worst spot in equity comp. An IPO can put you there for the length of the lockup. And the price can fall during that window, so you can owe tax figured on a high IPO-era value and then sell later into a lower one. The tax does not refund the difference.
What the day looks like
The IPO closes and the liquidity trigger fires
Every time-vested double-trigger unit settles. The full value becomes ordinary income for the year.
Withholding gets taken, and it is not enough
Your employer withholds at the flat supplemental rate, often by holding back shares. On an income spike this size, that rate trails your real top rate badly.
The shortfall is yours, and the IRS wants it soon
The gap between what was withheld and what you owe can be enormous, and quarterly estimated payments may be due well before next April.
The lockup lifts, and the clock on capital gains starts at vesting
Once you can sell, remember your basis is the settlement-day value you already paid ordinary tax on. Gains after that are capital gains, short or long term depending on how long past vesting you hold.
The gap between what your employer withholds and what you actually owe is what decides how deep the IPO-year shortfall runs, and a spike this size can cross the income surtax thresholds on top of it.
Supplemental withholding itself jumps to 37% on anything above $1,000,000.
Will a giant IPO vest push me into surtaxes?
A year of stacked RSU income can lift you past the thresholds for the additional Medicare tax and the net investment income tax, on top of a higher ordinary bracket. For 2026 the additional Medicare tax is 0.9% on wages above $200,000 for single filers and $250,000 for married filing jointly, and the net investment income tax is 3.8% once modified AGI crosses the same $200,000 single and $250,000 married-filing-jointly thresholds 2026. The direction is clear: stacking years of income into one is the most expensive way to receive it.
What this means for you
If an IPO is coming, treat that year as the largest income event of your life and plan the cash for the tax before the shares settle, not after you see the W-2. Know your lockup length, because that is how long you may owe tax on shares you cannot sell. And the day the lockup lifts, have a sell-or-hold plan already written, so you are not deciding under pressure while the stock swings. An IPO turns paper into a tax bill overnight. The people who sail through it are the ones who did the math a year early. Let’s talk if yours is on the calendar.
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