IPO Lockup Expiration: How One Employee Met a Tax Bill

IPO Lockup Expiration: How One Employee Met a Tax Bill

Illustrative anonymized composite, drawn from recurring patterns rather than a single engagement. The firm named below was not involved in it. Every dollar figure, share count, price, rate and timeframe is invented and rounded. Nothing here is guaranteed or predictive.

IPO lockup expiration feels like the day the tax bill starts, because it is the day the shares finally become cash. It is not. In this composite, an engineer at a newly public company watched restricted stock units vest during the lockup, could not sell a share, and then found that the tax on those shares had come due months before the stock could pay for it.

Doug Johnson CPA, a Los Angeles firm whose Sam's List profile lists Equity Compensation as a specialty, is the kind of firm an employee in that spot might ask about. Doug Johnson CPA is a vetted Sam's List member and a paying member of our featured program; payment does not buy the language we use or its reviews.

How the Lockup Left Shares Taxed but Unsellable

The employee held restricted stock units, or RSUs, at a company that went public. After the IPO, a lockup agreement barred insiders and employees from selling for a set period. In this composite, 1,000 RSUs vested during that period, when the shares traded at an invented $50, so about $50,000 of wage income arrived with no way to sell.

The vest was a taxable event. For RSUs, the value of the shares on the vest date is generally ordinary income, reported as wages, whether or not you can sell. A lockup restricts selling. It does not defer or cancel the tax.

The company withheld taxes by keeping part of the vested shares, and it used a flat federal supplemental rate for the withholding. That rate is commonly 22% for supplemental wages up to $1 million, and the employee assumed that meant the tax was handled.

The limitation: the withholding rate and method are set by the company and the plan, and they differ. Your own plan documents and pay statements show what applied to you.

The Withholding Gap Nobody Mentioned

The employee's salary alone already put them in a high bracket, so the vest income was stacked on top at a marginal rate well above the withholding rate. The gap between what was withheld and what the return would eventually owe was the problem. In this composite, it came to a shortfall of several thousand dollars for the year, and the employee had no cash set aside for it.

This is the pattern a CPA who works with equity compensation looks for first. Withholding on a vest is a payment toward the tax, not a calculation of it. For a higher earner, it can fall short, and nothing flags the shortfall until a return or an estimate is prepared.

Meanwhile the stock moved. The shares drifted down after the IPO, so the vest-date value that had been taxed as wages was higher than the price at which the employee could now sell. That mismatch is not an error and it is not rare. It is what holding a taxed asset you cannot sell looks like.

The limitation: the direction of the price after a vest is not predictable. In another composite the stock rises, the gap is the same, and the shares cover it more easily.

Selling Shares After a Lockup: What the Sale Itself Taxes

The employee asked the first question most people ask. Is the sale taxed as well? The answer was partly yes, and mostly on a different measure.

The tax basis in the shares is generally the vest-date value that was already taxed as wages. A sale after the lockup is then a capital gain or loss on the difference between the sale price and that basis. The holding period generally begins on the vest date, not the IPO date and not the lockup end. Shares sold within a year of vest are short term. Shares held longer than a year can be long term, which is often taxed at lower rates.

In this composite the employee sold the shares needed to cover the tax once the lockup ended, at about $40, against a vest-date basis of $50. That produced a capital loss, not a gain. It did not erase the wage income from the vest. It could offset capital gains, and a limited amount of other income, with the remainder carried forward under rules a preparer should confirm against the current IRS instructions.

The limitation: lots tracking matters. The brokerage's records might not match the vest-date basis the return needs, and a wrong basis can turn a loss into a reported gain, or the reverse.

Estimated Tax on Stock Sales and Vests

The harder issue was cash timing. The employee needed to pay the shortfall, and the lockup had made the shares unavailable for most of the year. Estimated tax on stock sales and vests is paid in installments, and the IRS can charge an underpayment penalty when too little is paid by each due date.

A CPA focused on equity compensation would typically walk through three questions. How much tax was withheld on each vest, and what does the year look like in total? Does a safe harbor apply, such as paying a set percentage of the prior year's tax, which is generally higher for people above a certain income level? And does it make sense to raise the withholding on the next vest, or send an estimated payment, instead of waiting for the return?

The limitation: safe harbors, rates and due dates change, and state taxes can add their own rules. Confirm them against the current IRS instructions and your state's before relying on any of this.

What a CPA Reworked: Sell Schedule, Estimated Payments, Lots

In this composite, the employee brought a vest history, pay statements and a brokerage account to a CPA. The reworked plan had three parts.

First, a sell schedule. The employee decided in advance which lots to sell and when, so the sales that covered the tax followed a plan instead of a rush. This also meant thinking about how much of the employee's net worth sat in one employer's stock, a separate question from tax.

Second, estimated payments. The preparer projected the year's total tax, subtracted the withholding and set quarterly payments for the gap. This reduced the risk of an underpayment penalty, although it did not guarantee that none would apply.

Third, a lot log. For each vest, the file listed the date, the shares, the vest-date value, the withholding and any later sale. When the employee sold, the basis on the return came from that log.

The limitation: none of this recovers the value the stock lost. A better plan changes the surprise and the paperwork, not the price.

What Changed, and What Did Not

The employee ended the year with a projected tax number they understood, estimated payments scheduled and a short list of questions for the next vest. The cost was an uncomfortable conversation, a higher tax payment than the withholding suggested and a capital loss that helped less than hoped.

Not everything resolved. The employee still held a large share of their savings in one stock, still had later vests coming and could not know the price at which those would be taxed. Another employee with a rising stock could have owed the same gap and ended with a gain on the sale. Results depend on the plan, the price and the rest of the return, so treat this as a pattern to look for, not a forecast.

Where Doug Johnson CPA Fits

Doug Johnson CPA is based in Los Angeles, founded in 2024, with three employees, serving clients nationwide. Its live profile positions the firm for growing businesses in the $250,000 to $10 million revenue range and for high earners with equity compensation. It lists SMB Owners, Equity Compensation, High Net Worth Individuals and Growing Companies as specialties, and states minimums of $250,000 in income or revenue. It was not involved in this composite.

Doug Johnson CPA has 15 verified client reviews on Sam's List. Each review is submitted by an individual who identifies as a client of the firm and rates it on communication, subject-matter knowledge, and overall satisfaction. Reviews reflect those individual experiences and do not represent an endorsement by Sam's List. Doug Johnson CPA is a paying member of our featured program, and payment does not buy its reviews. Ratings and rankings are not indicative of future performance or results.

The limitation, plainly: the profile does not mention RSU withholding gaps, lockups or estimated tax planning by name, so ask what is included and how the firm handles a vest during a lockup before you hire it. A review count shows how many clients wrote something down, not how well a firm handles your plan. The income minimums mean it may not fit every employee.

Frequently Asked Questions

Is an RSU taxed when the lockup ends?

Generally no. RSUs are taxed as wages when they vest, based on the value that day, even if a lockup keeps you from selling. When the lockup ends and you sell, the sale is a separate capital gain or loss measured from the vest-date value. Confirm your plan's details with a tax professional.

Is withholding on an RSU vest enough?

Not always. Companies often withhold at a flat supplemental rate, commonly 22% federally for amounts up to $1 million, which can be lower than a high earner's marginal rate. Compare your withholding with a projection of your full-year tax, and consider an estimated payment or higher withholding if there is a gap.

Is a sale after the lockup short term or long term?

It depends on the holding period, which generally starts on the vest date. Shares sold within a year of vest are short term, and shares held longer than a year can be long term. The dates for each vest are tracked separately, so keep a lot log.

Do I need to make estimated payments after selling shares?

You might. If withholding and payments during the year fall short of what you will owe, an underpayment penalty can apply. A safe harbor based on your prior year may help, but the rules and thresholds change, so confirm them against the current IRS instructions or with a CPA.

If a vest or a lockup end is coming, collect your vest records, pay statements and brokerage lots before you talk to anyone. You can browse accountants on Sam's List, including the firm above, and ask each how it handles equity compensation and estimated payments.

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About the author: Kimberly Green is the cofounder of Sam's List, where business owners and high earners find vetted CPAs, financial advisors, and fractional CFOs. She's met one-on-one with 400+ financial professionals and writes from the real data behind thousands of client-advisor matches. Ask her anything about finding an accountant - she's heard it all, including the questions people are afraid to ask.