Executive Summary
What is California Tax on Equity Compensation: State Tax Implications?
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California taxes equity compensation (e.g., stock options, restricted stock) as compensation income sourced to the state based on workdays performed in California during the period from grant (or purchase) to exercise (or vesting), regardless of residency at exercise or sale. This applies to residents, nonresidents, and part-year residents via an allocation ratio of California workdays divided by total workdays in that period.3
Sourcing Rules for Common Equity Types
California follows federal characterization of equity compensation under IRC §83 (property transferred in connection with services) but sources the income to California using a workday allocation formula.3 Key rules from FTB Publication 1004 (Rev. 11-2023):
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Nonqualified Stock Options (NQSOs): Bargain element (FMV at exercise minus exercise price) is sourced based on workdays from grant date to exercise date.
Example: Grant on Jan 1, 2013; exercise Aug 1, 2013 (FMV $50/share, strike $20/share, 1,000 shares). Total stock option income = $30,000 ($30/share × 1,000). Total workdays: 1,000 (700 CA + 300 other). Allocation ratio: 70% (700/1,000). CA taxable income: $21,000 (70% × $30,000). Report on Form 540 (residents) or 540NR (nonresidents).3 -
Incentive Stock Options (ISOs): No regular income at exercise (if qualifying), but if disqualifying disposition or later sale while CA resident, capital gain is taxed as CA resident income.
Example: Grant Feb 1, 2010 (OH resident); exercise Apr 1, 2013 (nonresident); move to CA Sep 1, 2014; sell Oct 15, 2014 at gain. CA taxes full capital gain as resident at sale.3 -
Restricted Stock (e.g., RSUs): Income at vesting (FMV minus amount paid, if any) sourced by workdays from purchase/grant to vesting date.
Example: Purcha
Footnotes
Primary Sources
| Source | Type | URL |
|---|---|---|
| 3 | Reference | https://www.ftb.ca.gov/forms/misc/1004.html |
| 3 | Reference | https://www.ftb.ca.gov/forms/misc/1004.html |
| 3 | Reference | https://www.ftb.ca.gov/forms/misc/1004.html |
| 3 | Reference | https://www.ftb.ca.gov/forms/misc/1004.html |
| 3 | Reference | https://www.ftb.ca.gov/forms/misc/1004.html |
Disclaimer: This guide discusses legal tax optimization strategies only. Tax evasion is illegal and is never recommended. This content is for educational purposes and does not constitute tax, legal, or financial advice. Tax laws vary by jurisdiction and change frequently. Always consult a qualified tax professional (CPA, tax attorney, enrolled agent) before making decisions based on this information. The authors accept no liability for actions taken based on this content.