Your RSUs Are the Biggest Bet You Didn't Choose

You joined a public tech company six years ago. You got RSUs as part of your offer. They vested. You held them. Your company stock tripled. Now your portfolio is 72% one ticker, and every quarterly report feels like roulette.

You are not an investor. You are a bettor, and you never placed the bet. The company placed it for you the day you signed the offer letter.

Here is the problem: diversifying out of a concentrated RSU position triggers a tax bill. A big one. So you do nothing, and the concentration grows, and the tax bill grows with it. What you need is a plan that unwinds the position methodically, over years, without a single catastrophic tax event. That plan exists, and it starts with three questions.

Question 1: What do you actually own?

Before you sell a share, you need the answer to a question most people skip: what is the cost basis on every lot you hold?

RSUs vest in tranches. Each vesting date creates a tax lot with its own basis — the fair market value on the vest date. If the stock was at $42 when your first grant vested and $127 when your fourth grant vested, those shares carry different built-in gains. Selling the $42 shares first realizes more gain per share. Selling the $127 shares first realizes less.

Most brokerages default to FIFO — first in, first out. That means the oldest, lowest-basis shares get sold first, which maximizes the tax hit in the near term. Switching to specific identification lets you pick which lots to sell. Sell the high-basis lots first, and the same dollar amount of diversification costs you less in tax.

This is not a brokerage setting you toggle in an app. It is a deliberate election you make before settlement, and once a lot is sold, the basis method sticks. Get it wrong on the first sale and you pay more than you needed to.

Question 2: What bracket do these shares land in?

RSU shares sold within a year of vesting produce short-term capital gains, taxed as ordinary income at rates up to 37% federal plus state. Shares held more than a year after vesting produce long-term capital gains, taxed at 15% or 20% plus the 3.8% net investment income tax.

But that is only the federal picture. California taxes all capital gains — short and long — as ordinary income at rates up to 13.3%. A tech executive in San Diego selling $200,000 of long-term gain pays roughly $43,600 in combined tax. The same sale in Texas pays roughly $27,600. The state line alone is $16,000.

The bracket question is also a timing question. If your ordinary income is $600,000 this year and the capital gain stacks on top, the gain fills the 20% federal bracket. If next year you take a sabbatical or go to a startup with lower cash comp and your ordinary income drops to $200,000, some of that gain may land in the 15% bracket. Selling in the lower-income year saves real money.

The multi-year framework

The framework is simple in concept and hard in execution without a plan: sell a fixed percentage of the concentrated position each year, targeting a tax bracket boundary, and reinvest the after-tax proceeds into a diversified portfolio.

A representative plan for a tech executive with $1.8 million in one stock:

• Year 1: Sell 20% ($360,000 pre-tax). If $280,000 is long-term gain, the federal tax at 20% plus NIIT is roughly $66,600. California takes another $37,200. After-tax proceeds: roughly $256,000. Reinvest into a diversified portfolio of index funds.
• Year 2: Sell another 20%. The remaining position is smaller, the gain per share may be different, and your income picture may have changed.
• Year 3 through 5: Repeat until the position represents no more than 15-20% of your net worth.

Five years sounds slow. It is. But rushing the process can push a single year's sale into the 20% bracket plus the 3.8% surtax, costing tens of thousands you could have avoided by waiting twelve months. The same discipline that built the position — patience — is what unwinds it most efficiently.

What about hedging?

Some executives ask about hedging strategies: collars, prepaid variable forwards, exchange funds. These exist, and they work, but they come with complexity and cost.

A collar — buying a put and selling a call against your position — can limit downside at the cost of capping upside. An exchange fund pools your concentrated stock with other investors' positions, diversifying without an immediate sale, but requires a seven-year minimum commitment and has specific eligibility rules.

These are tools for very large positions — typically $5 million and above — where the concentration risk is existential and a multi-year sale plan alone cannot move fast enough. For most tech executives with $500,000 to $3 million in one stock, the multi-year systematic sale plan is simpler, cheaper, and keeps you in control.

The 10b5-1 plan and why it matters

A 10b5-1 plan is a pre-scheduled trading arrangement that lets company insiders sell stock on a fixed schedule without running afoul of insider trading rules. You set the dates, the share counts, and the price limits in advance, when you do not possess material non-public information. The plan executes automatically.

Why does this matter for tax planning? Because a 10b5-1 plan forces the discipline a multi-year diversification strategy needs. It commits you to selling on a schedule, removing the emotional decision of "is now the right time?" — which, for most people holding concentrated stock, means "never."

We covered 10b5-1 mechanics in more detail in a related post on how a 10b5-1 plan decides the tax bill. The short version: combine a 10b5-1 plan with specific share identification, and you automate the tax-efficient diversification framework.

The California exit timing problem

Many tech executives consider leaving California before unwinding a large position. The logic is sound: California taxes capital gains at up to 13.3%, so leaving before selling could save six figures.

But the California Franchise Tax Board is aggressive about residency audits. The test is "totality of circumstances" — where you live, work, vote, register your car, send your kids to school, keep your doctors, and maintain your social ties. Leaving California means leaving, not just buying a house in Nevada and flying back every other weekend.

If you plan to relocate, coordinate the timing. The multi-year diversification plan starts after your residency is established elsewhere and the FTB's look-back window has closed. Selling in year one of Texas residency while still holding a California driver's license is an expensive mistake.

The bottom line

Your RSUs built wealth you did not expect. They also built risk you did not choose. The answer is not to sell everything on a Tuesday in a panic or to hold forever in a paralysis. The answer is a plan: know your basis, pick your lots, spread the sales across years, coordinate with your income, and let a 10b5-1 plan enforce the discipline your emotions will resist.

Most tax preparers file what happened. A strategist designs what happens next. If your portfolio looks like a bet you never meant to place, the time to start unwinding it is before the next vesting date, not after.

FAQ

How do I diversify a concentrated RSU position without a huge tax bill?

Sell systematically over multiple years using specific share identification. Sell the highest-basis lots first to minimize near-term gain. Spread sales across tax years to stay within lower capital gains brackets. Coordinate with years when your ordinary income is lower.

What is specific share identification and why does it matter?

Specific identification lets you choose which tax lots to sell rather than defaulting to FIFO. Selling high-basis shares — those that vested when the stock price was higher — realizes less gain per share, reducing the tax hit on each sale.

Should I use a 10b5-1 plan to diversify RSUs?

Yes, if you are a company insider. A 10b5-1 plan automates the sale schedule and provides an affirmative defense against insider trading claims. It also removes the emotional barrier to selling on a fixed schedule.

Does California tax capital gains from RSU sales differently?

Yes. California taxes all capital gains as ordinary income at rates up to 13.3%, regardless of holding period. Combined with federal rates and the NIIT, a California resident can pay over 37% on long-term capital gains.

Can I hedge my RSU position instead of selling?

Hedging strategies like collars and exchange funds exist but are generally suitable for positions above $5 million. They involve complexity and cost. For most positions between $500,000 and $3 million, a multi-year systematic sale plan is simpler and cheaper.

How do I coordinate RSU diversification with a move out of California?

Establish residency in the new state first — including driver's license, voter registration, and primary home — before beginning the sale plan. Selling while still holding California ties means California will tax the gains. The FTB audits former residents aggressively.

Next step: if your equity is concentrated in one stock or you're planning a move out of California, see how we build a plan for it: Concentrated Stock & RSU Tax Planning.

---

Want to talk this through? Book a free 15-minute discovery call