Executive Summary
What is IPO Lockup Periods: Tax Planning Before Going Public?
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IPO Lockup Periods and Tax Planning: Key IRS Rules and Strategies
IPO lockup periods, typically lasting 90-180 days post-IPO, restrict insiders from selling shares, creating tax challenges when income is triggered (e.g., RSU vesting or option exercises) before liquidity is available[1][2][3][4]. Tax planning focuses on timing exercises, withholdings, and deferrals under IRC provisions like Section 83 (property transferred for services) and Section 83(i) (deferral election), with reporting via Forms 3921 (ISO exercises) and 3922 (ESPP transfers)[5][6].
Tax Triggers During Lockups
- RSU Vesting: Taxed as ordinary income at vesting (fair market value, FMV), even during lockup. IRS treats as supplemental wages with 22% federal withholding (plus state, e.g., 10.23% California). Companies sell shares to cover taxes despite lockup[1][4].
- Example: 2,500 RSUs vest January 1, 2026, at $10/share FMV = $25,000 income. Federal withholding: 22% = $5,500 (550 shares sold). Net: ~1,950 shares held until lockup ends July 1, 2026; post-tax sale might yield ~1,450 shares after additional liability[1].
- NSO Exercises: Ordinary income on spread (FMV - strike) at exercise; lockup delays cash for payment[2][4].
- ISO Exercises: No regular tax at exercise, but AMT on bargain element (up to $100,000 annual ISO limit** before becoming NSOs); hold through year-end risks large AMT if unsold[4][6].
- ESPP Transfers: Reporting required on first transfer (e.g., to brokerage on purchase date)[5].
Primary Sources:
- IRC §83 – Taxation of property transferred in connection with services; basis and holding period start at transfer.
- IRC §83(i) – Qualified equity grants allow 5-year deferral of income (up to FMV at grant), but ends on IPO date; employer withholds/remits that day despite lockup[6].
- [Treas. R
Footnotes
Primary Sources
| Source | Type | URL |
|---|---|---|
| IRC §83 | Reference | https://www.law.cornell.edu/uscode/text/26/83 |
| IRC §83(i) | Reference | https://www.law.cornell.edu/uscode/text/26/83 |
| Treas. Reg. §1.83-1 | Reference | https://www.law.cornell.edu/cfr/text/26/1.83-1 |
| Treas. Reg. §1.83-6 | Reference | https://www.law.cornell.edu/cfr/text/26/1.83-6 |
| Form 3921 | Reference | https://www.irs.gov/pub/irs-pdf/f3921.pdf |
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.