Capital Gains Taxes

Capital gains taxes are one of the most consequential — and most misunderstood — parts of the tax picture for tech workers at FAANG companies. Between RSUs vesting, concentrated stock positions accumulating over a career, ESPP purchases cycling quarterly, and taxable brokerage accounts compounding in the background, a senior engineer at Google, Meta, or Amazon can easily realize $200,000–$1,000,000 in capital gains in a single year without executing a single deliberate investment decision.

The stakes are especially high in California, where capital gains are taxed as ordinary income at rates up to 13.3% — on top of federal rates that can reach 23.8% including the Net Investment Income Tax. A California resident selling $500,000 in appreciated stock faces a combined marginal rate of up to 37.1% on those gains. A Washington-based Amazon or Microsoft employee faces 7%–9.9% in state capital gains tax on top of federal obligations, a liability that did not exist before 2022 and that catches many employees off guard. Understanding exactly how these taxes work — and where the planning levers are — is essential for anyone with meaningful equity compensation.

The Federal Capital Gains Framework

The federal government distinguishes between two types of capital gains based on how long you held the asset before selling:

Short-term capital gains apply to assets held for one year or less. They are taxed at the same rates as ordinary income — up to 37% at the federal level in 2026. For a tech worker in the top federal bracket, short-term gains are the most expensive type of income to realize.

Long-term capital gains apply to assets held for more than one year. The federal rates in 2026 are:

• 0% — for taxable income up to $96,700 (single) or $193,400 (married filing jointly)
• 15% — for taxable income between those thresholds and $533,400 (single) or $600,050 (MFJ)
• 20% — for taxable income above $533,400 (single) or $600,050 (MFJ)

Most senior tech workers at FAANG companies land in the 20% federal long-term rate bracket. When the 3.8% Net Investment Income Tax (NIIT) is layered on top — which applies to individuals with Modified Adjusted Gross Income above $200,000 (single) or $250,000 (MFJ) — the effective federal rate on long-term capital gains reaches 23.8%.

The holding period is measured from the acquisition date to the sale date. For RSUs, the acquisition date is the vest date — not the grant date. For ESPP shares, it is the purchase date (disqualifying disposition rules) or the offering date (qualifying disposition rules). For stock options, it depends on the option type and when you exercised.

California: Capital Gains Taxed as Ordinary Income

California does not distinguish between capital gains and ordinary income. Whether your gain is short-term or long-term, California taxes it at the same graduated rate schedule that applies to wages and salary. The 2026 top marginal rate is 13.3%, applying to income above $1,000,000 for single filers and $1,340,000 for married filing jointly. The 9.3% bracket begins at $68,350 (single) or $136,700 (MFJ).

This means a California-based software engineer at Google selling $400,000 in long-term appreciated stock pays:

• 20% federal long-term capital gains
• 3.8% NIIT (if MAGI exceeds $200,000 single or $250,000 MFJ)
• 9.3%–13.3% California income tax

Combined marginal rate: 33.1%–37.1% on the gain. On a $400,000 gain, that is $132,000–$148,000 in combined federal and state tax — before any consideration of whether that sale pushes additional income into higher brackets or triggers other tax interactions.

California also does not recognize federal preferential rates on qualified dividends. Dividends that the IRS taxes at 0%, 15%, or 20% are taxed by California as ordinary income at the full state rate. This makes high-dividend assets particularly expensive to hold in taxable California accounts.

Washington: The Capital Gains Tax Since 2022

Washington has no state income tax on wages or ordinary income. But since 2022, Washington imposes a capital gains tax on long-term capital gains above an annually adjusted threshold. For 2025, the threshold is $278,000 per individual (not doubled for married filers). The rate structure is graduated:

• 7% on long-term capital gains between $278,000 and $1,000,000
• 9.9% on long-term capital gains above $1,000,000

The tax applies to gains from sales of stocks, bonds, and most investment assets. It does not apply to real estate, retirement account distributions, or short-term capital gains (which Washington does not tax separately — they are simply not taxed as income in Washington). Only long-term capital gains above the threshold are in scope.

For an Amazon L6 or L7 engineer in Seattle with a large RSU position accumulated over six or seven years, selling $1,500,000 in appreciated stock in a single year generates approximately $100,040 in Washington state capital gains tax: 7% on $722,000 (the band between $278,000 and $1,000,000) plus 9.9% on $500,000 (above $1,000,000). This liability did not exist before 2022 and has changed the planning calculus for Washington-based FAANG employees in meaningful ways — particularly around timing of large stock sales and retirement portfolio liquidation strategies.

Washington also imposes an estate tax on estates above $2,193,000 at rates up to 20% — far below the federal estate tax exemption of $15 million per individual in 2026. This is relevant context for long-tenured Amazon or Microsoft engineers whose combined RSU proceeds, brokerage accounts, and home equity have pushed net worth well above that threshold.

How RSUs Generate Capital Gains — and When They Don't

RSUs are one of the most common sources of capital gains confusion for FAANG employees. The mechanics matter because they determine when capital gains apply and when ordinary income rules govern instead.

When an RSU vests, the fair market value of the shares on the vest date is ordinary income — reported on your W-2 as wages. This compensation income is not a capital gain. It is subject to federal income tax, payroll taxes (up to the Social Security wage base), and state income tax. The vest-date value becomes your cost basis in the shares.

Capital gains arise only on appreciation after vest. If you sell immediately at vest, the sale price equals the vest-date value, the capital gain is zero, and no capital gains tax applies. If you hold the shares and they appreciate, the gain above your vest-date basis is a capital gain — short-term if held less than one year from vest, long-term if held more than one year.

The one-year holding period for long-term treatment runs from the vest date. If Google stock vests on March 1, 2025, you must hold until at least March 2, 2026, to receive long-term capital gains treatment on subsequent appreciation. The grant date, which may be years earlier, is irrelevant for holding period purposes.

For California residents, this distinction has limited practical value: both ordinary income and capital gains are taxed at the same California rates. The distinction matters for federal taxes — 37% ordinary rate versus 23.8% capital gains rate — but the California rate is identical either way. For Washington residents, the distinction has a specific dimension: Washington does not tax ordinary income or short-term capital gains, but taxes long-term capital gains above $278,000 at 7%–9.9%. Holding RSU shares for over a year in Washington converts non-taxable appreciation (if below $278,000) into potentially taxable long-term gain.

Stock Options: ISOs and NSOs Have Different Capital Gains Consequences

Stock options at early-stage or pre-IPO tech companies generate capital gains in more complex ways than RSUs at public FAANG companies.

Non-Qualified Stock Options (NSOs) work similarly to RSUs for capital gains purposes. When you exercise an NSO, the spread between the exercise price and the fair market value at exercise is ordinary income — taxed as wages. Your basis in the acquired shares is the fair market value at exercise. Capital gains arise only on appreciation after exercise. A short-term gain applies if you sell within one year of exercise; long-term applies after holding for more than one year from the exercise date.

Incentive Stock Options (ISOs) receive preferential tax treatment under the Internal Revenue Code but introduce Alternative Minimum Tax (AMT) complexity. When you exercise an ISO, there is no ordinary income recognition for regular tax purposes — but the spread at exercise is an AMT preference item that can trigger AMT liability in the year of exercise. If you hold ISO shares for at least two years from the grant date and at least one year from the exercise date (the "ISO holding period"), the eventual gain on sale is taxed entirely as long-term capital gain — no ordinary income, no payroll taxes on the appreciation.

The AMT exposure at exercise is the critical planning variable. Exercising a large ISO position when the spread is large — common at a company that has grown significantly since the grant — can generate a substantial AMT bill even if you have not sold any shares and received no cash. Many startup employees have been caught by this: exercised ISOs, incurred large AMT, then saw the stock decline before sale, owing AMT on paper gains that were never realized as cash.

California does not recognize the ISO preferential treatment for state tax purposes. California taxes ISO exercise spreads as ordinary income regardless of the federal rules, making the ISO planning calculus for California residents largely a federal-only optimization with full state income tax at exercise regardless.

ESPP: Two Flavors of Capital Gains Treatment

Employee Stock Purchase Plans at FAANG companies typically allow employees to purchase company stock at a 15% discount, often based on the lower of the stock price at the beginning or end of a six-month offering period. The tax treatment depends entirely on how long you hold the shares after purchase.

Disqualifying disposition: If you sell ESPP shares within two years of the offering date or within one year of the purchase date, the discount element is ordinary income reported on your W-2. Any appreciation above the purchase price is a short-term or long-term capital gain depending on the holding period from the purchase date. Most employees who sell ESPP shares immediately after purchase — a common strategy to avoid single-stock risk — trigger a disqualifying disposition, converting the full discount into ordinary compensation income with no capital gains component.

Qualifying disposition: If you hold ESPP shares for more than two years from the offering date and more than one year from the purchase date, the ordinary income component is capped at the discount element based on the offering-date price, and any additional gain is long-term capital gain. For companies where the stock has appreciated significantly between the offering date and sale, a qualifying disposition shifts a meaningful portion of the gain from ordinary rates to capital gains rates — a potentially valuable tax saving at the federal level. For California residents, the rate differential between ordinary income and capital gains is zero, so the qualifying disposition benefit is purely a federal tax optimization.

Short-Term vs. Long-Term: The Holding Period Decision for FAANG Stock

The conventional wisdom that "always hold for long-term gains" is often wrong for FAANG employees, particularly in California. The analysis requires quantifying the specific tradeoff rather than applying a blanket rule.

Consider a Google engineer who receives RSUs vesting in March 2025 at $180/share. By March 2026 — the one-year long-term threshold — the stock has risen to $200/share. The question is whether holding the extra 12 months to convert the $20/share gain from short-term to long-term is worth the additional concentration risk and the one-year delay in diversification.

For a federal-only analysis, the rate differential is substantial: 37% short-term versus 23.8% long-term, a 13.2-percentage-point saving. On $20/share of appreciation with 1,000 shares, the federal tax saving from long-term treatment is approximately $2,640. Whether that saving justifies the additional 12 months of single-stock concentration risk depends on position size, the investor's tolerance for single-stock volatility, and alternative uses of the capital.

For California residents, the tradeoff shifts significantly. California taxes both at the same ordinary income rate — up to 13.3%. The federal saving is real, but California captures its full share regardless. Additionally, if the stock declines during the holding period, you lose both the holding period advantage and suffer a real-dollar loss on the concentrated position.

For Washington residents, the reverse calculation applies for large positions. If total long-term gains in the year would exceed $278,000, holding past the one-year threshold converts non-taxable (to Washington) short-term gain into Washington-taxable long-term gain. In this scenario, selling before the one-year mark — accepting short-term federal treatment — avoids Washington's 7%–9.9% state rate on the appreciation. The Washington capital gains tax has inverted the conventional holding period strategy for high-volume sellers in that state.

Tax-Loss Harvesting: The Capital Gains Offset Mechanism

Capital losses — realized when you sell an investment for less than your basis — offset capital gains dollar-for-dollar. Short-term losses first offset short-term gains; long-term losses first offset long-term gains. Net short-term gains are taxed at ordinary rates; net long-term gains receive preferential rates. Excess losses in either category can cross over to offset the other category. Up to $3,000 of net capital losses can offset ordinary income per year; excess losses carry forward indefinitely.

For tech workers with concentrated RSU positions, tax-loss harvesting in the broader taxable portfolio — systematically realizing losses in diversified index funds or sector ETFs during market downturns — creates a supply of capital losses that can offset RSU-related and other capital gains. A disciplined harvesting program in a $1,000,000 taxable portfolio can generate $20,000–$80,000 in losses in a significant down year, which directly offsets capital gains that would otherwise be taxed at 33%–37% in California or 27.8% in Washington.

The wash-sale rule is the primary constraint: you cannot deduct a loss on a sale if you purchase substantially identical securities within 30 days before or after the sale. For broad index funds, this is manageable — selling Vanguard Total Market and immediately purchasing iShares Total Market avoids the wash sale while maintaining market exposure. For individual stocks, particularly FAANG names, the wash-sale rule prevents you from harvesting a loss on Google stock and buying back Google stock within the 61-day window.

Harvested losses have a specific value ordering. A short-term loss that offsets a short-term gain saves taxes at ordinary income rates — up to 37% federal plus state. A long-term loss that offsets a long-term gain saves 23.8% federal plus state. Losses that offset ordinary income are worth more per dollar than losses that offset long-term gains, which is why maintaining a mix of harvesting opportunities across holding periods matters.

Capital Gains and the NIIT: The Invisible 3.8% Surcharge

For tech workers with MAGI above $200,000 (single) or $250,000 (MFJ), all net capital gains are also subject to the 3.8% Net Investment Income Tax on top of the federal capital gains rate. This effectively raises the federal long-term rate from 20% to 23.8% for high earners. The NIIT applies to both short-term and long-term capital gains — there is no holding period exception.

The NIIT is computed on the lesser of net investment income or MAGI above the threshold. For a tech worker whose salary alone already pushes MAGI well above the threshold, the NIIT applies to 100% of capital gains regardless of the gain amount. Strategies that reduce capital gains — tax-loss harvesting, deferring gain recognition, using tax-advantaged accounts — reduce NIIT dollar-for-dollar. But strategies that only slightly reduce MAGI while leaving capital gains unchanged have no effect on NIIT if MAGI remains far above the threshold from salary alone.

The Qualified Small Business Stock (QSBS) Exclusion

For tech workers who joined early-stage companies and received stock options or restricted stock, Section 1202 of the Internal Revenue Code provides a potentially transformative capital gains benefit. Gain from the sale of Qualified Small Business Stock held for more than five years can be excluded from federal capital gains tax — up to 100% of the gain for stock acquired after September 27, 2010.

To qualify, the stock must have been issued by a domestic C corporation with gross assets under $50 million at the time of issuance. The investor must have acquired the stock at original issuance — not on the secondary market. The company must be in a qualifying trade or business (most tech companies qualify; professional services like law and consulting do not). The investor must have held the stock for more than five years.

The per-issuer exclusion limit is the greater of $10 million or 10 times the investor's basis in the stock. For an early employee who invested $100,000 in founding stock that grew to $5,000,000, the 10x basis limit is $1,000,000 — not enough to exclude the full gain. But for a founder with a $10,000 basis in a company that sold for $50,000,000, the $10 million cap excludes $10 million of gain entirely — eliminating approximately $2,380,000 in federal tax.

California does not conform to the QSBS exclusion. California taxes QSBS gains as ordinary income at the full state rate regardless of federal eligibility. For a California resident, QSBS gain is tax-free at the federal level and taxed at up to 13.3% at the state level — still a dramatic improvement over a non-QSBS position, but not the full elimination that federal treatment alone suggests.

Opportunity Zones: Deferring and Excluding Capital Gains

The Qualified Opportunity Zone (QOZ) program allows investors who realize capital gains to defer — and partially exclude — those gains by reinvesting the gain proceeds into a Qualified Opportunity Fund within 180 days of the sale. The mechanics relevant for tech workers realizing large gains:

• Deferral: The reinvested gain is deferred until the earlier of the QOZ investment's sale or December 31, 2026, under current law. You still owe tax on the original gain eventually — but the deferral frees up capital to compound in the QOZ fund.
• Step-up: Current law provided a 10% and 15% basis step-up for qualifying five-year and seven-year holds respectively — but these enhancements have phased out for investments made after 2019. The remaining benefit for new investments is purely the deferral and the exclusion on QOZ appreciation.
• Permanent exclusion on QOZ appreciation: If the QOZ investment is held for at least 10 years, any appreciation on the QOZ fund itself — above the reinvested basis — is permanently excluded from federal capital gains and NIIT. This is meaningful for long-horizon investors who reinvest a large gain and hold through a successful QOZ fund cycle.

The constraints are significant: QOZ investments must be in designated low-income census tract businesses or real estate, are illiquid for the 10-year hold, and require substantial investment due diligence. They are suitable for a portion of a large capital gain for investors with a long time horizon and tolerance for illiquidity, not as a general capital gains deferral tool for most tech workers.

Asset Location: Minimizing Capital Gains Tax Through Account Placement

Which investments you hold in which account types has a substantial impact on your lifetime capital gains tax exposure. The principle is straightforward: assets that generate the most heavily taxed income belong in accounts where that tax is eliminated or deferred.

Tax-advantaged accounts (401(k), IRA, Roth IRA): Investment activity inside these accounts — dividends, interest, capital gains from rebalancing — generates no current tax. Rebalancing a 401(k) from equities to bonds does not trigger any capital gains. Assets that would generate high capital gains in a taxable account — actively managed funds with high turnover, REITs, high-yield bonds, emerging market funds with frequent distribution events — are more efficiently held here.

Taxable brokerage accounts: Best suited for low-turnover, tax-efficient assets: broad index funds that rarely distribute capital gains, individual stocks held for the long term (where you control the timing of realization), and municipal bonds (whose interest is exempt from federal and often state income tax). For California residents paying 13.3% on all investment income, muni bonds provide a meaningful after-tax yield advantage over taxable bonds in taxable accounts.

Roth IRA / Roth 401(k): Highest-return potential assets belong in Roth accounts, where growth is permanently tax-free. A FAANG stock position or growth equity fund that doubles or triples generates no capital gains tax if held in a Roth. This makes Roth accounts especially valuable for younger tech workers with long investment horizons and high expected equity returns.

Timing Capital Gains Realizations: Year-by-Year Income Management

For tech workers with discretion over when to realize capital gains — as opposed to mandatory RSU vests, which are taxable regardless of preference — timing decisions can materially reduce lifetime tax burden.

Bunching and smoothing: If you anticipate higher income in 2026 (a large RSU vest, a bonus, a planned stock sale) than in 2027, deferring voluntary capital gains realizations to 2027 when your MAGI will be lower can shift income from a higher bracket to a lower one. A California resident who realizes $200,000 in capital gains in a year when total income is $700,000 (13.3% state rate) could save 4% in state tax by deferring to a lower-income year — approximately $8,000.

Year-end harvesting: Reviewing the taxable portfolio in November and December — before year-end — identifies opportunities to realize losses that offset gains accumulated throughout the year. Gains realized in January through October from mandatory RSU vests, ESPP purchases, and rebalancing can be offset by strategically harvesting losses before December 31.

Retirement year transitions: The year before retirement, the year of retirement, and the first few years of retirement often represent lower-income years — potentially the only years in a FAANG engineer's adult life when their income falls below the 20% long-term capital gains bracket threshold or the NIIT threshold. These are structurally valuable windows for realizing gains at lower rates, doing Roth conversions, and repositioning concentrated positions.

Washington timing for large sales: Washington's capital gains tax threshold is $278,000 per individual. For a Washington-based employee planning a large concentrated stock sale, spreading the sale across multiple calendar years — keeping each year's long-term gains below $278,000 — can eliminate Washington state capital gains tax entirely on the transaction. A $2,000,000 gain split into eight annual $250,000 tranches generates zero Washington state tax; realized in a single year, it generates over $160,000 in state tax.

Concentrated Stock: The Central Capital Gains Problem for FAANG Employees

The most significant capital gains planning challenge for most FAANG employees is the concentrated stock position — a large holding in a single company accumulated over years of RSU vesting at an appreciated price. A Google engineer who has held vested RSUs for six years while the stock tripled has a portfolio that is simultaneously a large unrealized gain and a meaningful single-stock risk.

The tax cost of diversifying is real: selling the appreciated position realizes a capital gain taxed at up to 37.1% in California or 27.8% in Washington. The result is that many tech workers hold concentrated positions far longer than their risk tolerance would otherwise support, because the tax cost of selling appears prohibitive. This is a behavioral trap: the tax cost of selling is paid once, while the risk of a concentrated position is ongoing. The concentrated position in a company that declines 40%–60% — which all FAANG stocks have experienced at some point — can destroy more wealth than the tax bill would have cost.

Several mechanisms allow gradual diversification while managing — though not eliminating — the capital gains consequence:

Systematic annual sales: Selling a fixed dollar amount or percentage of the concentrated position each year, timed to years with lower overall income, harvesting losses elsewhere in the portfolio to offset gains, and reinvesting proceeds in diversified low-cost index funds. This approach maintains liquidity and flexibility at the cost of accepting the capital gains tax on each tranche sold.

Exchange funds: A partnership structure into which multiple investors contribute concentrated stock positions in exchange for a diversified interest — without triggering a taxable sale. The IRS treats the contribution as tax-free under Section 721 partnership rules, provided the fund holds shares for at least seven years. Exchange funds are available only to accredited investors, typically require $1M–$5M minimum contributions, and impose a seven-year lockup. For a FAANG employee with $3M–$15M in a single stock, an exchange fund provides diversification and permanent deferral of the embedded gain, at the cost of illiquidity and management fees.

Donor-Advised Funds (DAFs): Contributing appreciated stock directly to a DAF — rather than selling and donating cash — permanently eliminates both capital gains tax and NIIT on the contributed shares. The donor receives a charitable deduction for the full fair market value. For the portion of a concentrated position that an employee intends to donate to charity over time, the DAF contribution is the most tax-efficient mechanism available: full deduction, no capital gains recognition, no NIIT.

Charitable Remainder Unitrusts (CRUTs): An irrevocable trust into which appreciated stock is contributed. The trust sells the stock tax-free (charitable trusts are tax-exempt) and reinvests in a diversified portfolio. The donor receives an annual income stream for a term of years or life, and the remainder passes to charity. The capital gain is spread across distributions over the trust's term, potentially falling in lower-income years. CRUTs require genuine charitable intent for the remainder interest and are most appropriate for employees with significant philanthropic goals who also need a retirement income stream.

Planning Checklist for FAANG Employees

Given the complexity of capital gains interactions with RSUs, ESPPs, stock options, state taxes, NIIT, and concentrated positions, a structured annual planning review should cover:

• Project year-end total income: Wages, vest-date RSU income, ESPP ordinary income, other sources. Identify which federal capital gains bracket and whether NIIT applies.
• Map all scheduled RSU vests and ESPP purchase events for the remainder of the year. These are taxable regardless of action — model the income impact.
• Review the concentrated position: What is the current holding period? What is the embedded gain? Is the holding period threshold approaching? What is the single-stock risk relative to portfolio size?
• Survey the taxable portfolio for loss harvesting opportunities: Are there positions with unrealized losses that could offset year-to-date gains? Review before November to allow time to execute.
• Evaluate the holding period decision for recently vested RSUs: Quantify the federal tax saving from one-year hold. For Washington residents, explicitly model whether long-term treatment increases Washington capital gains tax exposure above the $278,000 threshold.
• Review asset location: Are high-income-producing assets (REITs, bonds, high-yield funds) sitting in taxable accounts when they could be inside a 401(k) or IRA?
• Check QSBS eligibility for any startup stock positions with five-year-plus holding periods. Confirm corporate status, qualifying business, and original issuance.
• Model any planned large capital events — business sales, secondary liquidity, real estate sales — against state-specific thresholds, NIIT exposure, and potential deferral mechanisms.