Capital gains tax, explained

You’re holding startup equity that could be worth a lot, now or in the future. But the moment you sell and turn those shares into cash, the IRS is standing by with a tax bill.

That’s where capital gains tax comes in. It’s the tax you pay when you sell your shares, and it can have a big impact on your payout.

What tax on capital gains means

Put simply: Capital gains tax is what you owe when you make money selling assets—stocks, crypto, real estate, NFTs (yes, even those). If you’re a startup employee, it’s the tax you pay when your equity finally turns into real cash.

While startup equity taxes can feel complicated, here’s one constant: capital gains taxes are a federal obligation. Whether you're selling shares in New York or Nebraska, your baseline tax rate on long-term capital gains comes from the IRS’s federally defined brackets—currently 0%, 15%, or 20%, depending on your income level.

Capital gains taxes fall into two main categories:

• Short-term gains (assets held one year or less) are taxed at your ordinary income rate
• Long-term gains (assets held more than one year) get preferential federal tax treatment

The clock starts ticking once you buy your shares (or they vest, in the case of RSUs). Sell them within a year? That’s short-term. Hold them for over a year? That’s long-term. And that time difference could cost—or save—you a lot.

Why capital gains tax matters for startup equity

If you’re holding ISOs, NSOs, or RSUs, your wealth doesn’t just depend on how your company performs. It also depends on when you sell. That’s because your tax bill could swing massively depending on how long you’ve held your shares and what your total income is that year.

Startup equity is usually taxed in two stages:

• Ordinary income tax when you exercise or receive RSUs
• Capital gains tax when you sell the shares  for more than their cost basis

The largest potential gains (and the biggest opportunities for tax savings) often come from how your capital gains are taxed.

2025 capital gains tax brackets and rates 

These are the federal capital gains tax brackets for long-term gains in 2025. In other words, here’s what you’ll pay if you hold your shares for more than a year before selling:
‍

If you’re in tech, odds are good you’ll land in that 15% or 20% bracket, unless you’re strategically timing your exit. More on that in a sec.

Capital gains tax examples

Want to calculate capital gains tax for your equity? Here's how scenarios can play out:

Scenario A: Quick Flip, Big Tax

You get 10,000 ISOs with a $1 strike price. The company IPOs, and you sell right away at $11/share. That $10 profit per share is a short-term capital gain, taxed like income. Depending on your bracket, you could owe up to 37%.

Scenario B: Diamond Hands Pay Off

Same 10,000 ISOs, same $11/share IPO price. But this time, you exercise your options and hold for 12+ months. Now you’re looking at long-term capital gains—just 15% or 20% on that same $100K gain.

That’s a potential tax savings of $17,000 or more. For waiting.

These capital gains tax examples show how timing can drastically affect your final payout and tax bill.

Special cases (Because the IRS loves complexity)

Some types of assets—and income levels—come with their own rules. Here are some exceptions worth knowing:

• If your income is over $200K (single) or $250K (married filing jointly), you’ll likely owe an additional 3.8% Net Investment Income Tax (NIIT) on top of your capital gains. This surtax applies to investment income, including equity sales, for high earners.
• Collectibles like art or coins? Taxed at a flat 28% if held long-term.
• Your home (if it’s your primary residence for 2+ years)? You can exclude up to $250K in gains (or $500K if married).
• Investment real estate? Depreciation gets “recaptured” and taxed at 25%.

How to minimize capital gains taxes

While you can’t avoid taxes completely, smart planning can help you reduce your capital gains tax liability. 

There’s no magic wand, but there are smart strategies. Here are the big ones:

1. Hold your shares for over a year

We can’t stress this enough. Holding gets you long-term rates. If you’re thinking of selling at month 11, maybe set a reminder for month 13 instead.

2. Harvest your losses

Got some losing investments? Sell them before year-end to offset gains. You can even deduct up to $3,000 from regular income if your losses are bigger than your gains.

3. Watch out for the wash sale rule

If you sell at a loss and buy the same asset within 30 days, the IRS won’t let you claim the loss. Don’t try to outsmart them—they’ve seen this trick.

4. Use a retirement account (if possible)

IRAs and 401(k)s let you buy and sell without triggering capital gains taxes—until you withdraw. Roth IRAs are even better: qualified withdrawals are tax-free.

5. Time your exit around income

Planning to leave your job and take a sabbatical? That low-income year could be perfect for selling shares and paying less in capital gains.

How to calculate capital gains tax on equity and stocks

To estimate your tax on selling stock or startup shares, follow these IRS-defined steps:

1. Separate short-term vs. long-term
   Group gains and losses based on how long you held the assets:
   
   • Short-term = ≤ 1 year → taxed at ordinary income rates
   • Long-term = > 1 year → taxed at 0%, 15%, or 20% depending on income
2. Tally net gains
   
   • Total short-term gains – short-term losses = net short-term gain/loss
   • Total long-term gains – long-term losses = net long-term gain/loss
3. Apply the tax rates
   Once netted, apply the short-term or long-term rates as applicable to each bucket.

If you're in a high income bracket, don’t forget the 3.8% Net Investment Income Tax may also apply.

Once you know your gain, tax bracket, and how long you held the asset, you can apply the capital gains tax rates and see what you’ll owe.

Common capital gains tax myths we hear 

These common misunderstandings about taxes on startup equity can cost you. Let’s set the record straight.

Myth: “I don’t owe taxes until I cash out.”
You might owe taxes when you exercise, especially with ISOs or NSOs. 

Myth: “All stock is taxed the same.”
Nope. ISOs, NSOs, and RSUs all come with different tax treatments.

Myth: “I can’t control my tax bill.”
Timing, strategy, and a little planning go a long way.

What’s next: How to plan for capital gains taxes on equity

Startup equity can be incredibly valuable—but only if you understand how it's taxed. Capital gains, income taxes, and timing all affect your final outcome.

If you’ve got startup equity, now’s the time to get your plan together:

• Figure out what type of equity you hold (ISOs, NSOs, RSUs)
• Track when you exercised or vested
• Know your company’s latest 409A or FMV
• Decide when to sell—and how much you’ll owe

Most people wing it. You won’t.

Prospect shows you how much your equity is worth, what you’ll owe in taxes, and when it’s smartest to sell. Our models even forecast future valuations—so you can decide whether to exercise now, hold, or cash out.

You’ve worked hard for this equity. Time to make it work for you.

‍