How to avoid the company stock mistakes that cost executives the most

Seven mistakes with company stock, ranked by what they cost

First-in, first-out is the broker default that costs the most. It reaches for the shares you've held longest, which usually carry the lowest basis. In Natalie's case (a hypothetical CFO we follow below), that means about $42,840 of federal tax on a $200,000 sale, compared with $0 from her most recent RSU lot.

The other six, each with its cost:

1. Holding RSUs for long-term rates when there's no gain to convert puts $40,000 at risk if the stock drops 20% on a $200,000 lot.

2. Letting in-the-money options expire forfeits the whole spread.

3. A wash sale around an ESPP purchase or vest freezes the loss for the current year.

4. Counting company stock in only one account understates your exposure.

5. Waiting for a target price before selling delays diversification.

6. Writing cash checks to charity while you hold low-basis shares wastes the chance to avoid tax on the gain.

The costs differ in kind. Some are permanent: expired options are simply gone. Others are deferrals you didn't choose, like a FIFO sale or a disallowed wash-sale loss.

Mariner Wealth Advisors recommends no sale until it has laid out each lot on one sheet: basis, holding period and estimated tax.

Why does holding vested RSUs for a year rarely pay?

Only growth after the vest date can become a long-term gain. At vest, the share price was reported as ordinary wages and became your basis. A lot that is flat since vest has nothing to convert into a lower rate.

Hypothetical: Natalie, 51, is CFO of a mid-cap industrial manufacturer. She's married to a part-time architect, they have two teenagers, and a 5x-salary ownership guideline binds her. About $1.3 million of her $3.2 million net worth sits in low-basis employer stock.

She wants to sell 2,000 shares at $100, raising $200,000, as her first diversification step. Her broker is set to sell the oldest shares first, which picks shares from years ago with a $10 basis. That gives a $20,000 basis and a $180,000 gain. At 23.8%, the assumed combined federal rate, the tax is $42,840 ($180,000 x 0.238).

If she names the 2,000 RSU shares that vested four months ago at $100, her basis is $200,000 and the gain is $0. The tax is $0. The table shows the three lots side by side; notice how the tax climbs as the basis falls.

Choosing the high-basis lot defers the $180,000 gain. It doesn't erase it. Natalie still decides later whether to sell, donate or keep those low-basis shares.

Holding the recent lot eight more months buys no tax saving, yet keeps $200,000 exposed to a single stock. A 20% drop would cost $40,000. Investing involves risk, including loss of principal.

Expired options and wash sales: the two calendar mistakes

Both of these are about dates, not market views. Vested NSOs and ISOs usually expire 10 years after grant, and many plans give only about 90 days to exercise after you leave.

The cost can be large. Say 5,000 options carry a $40 strike and the stock trades at $70: the spread is $30 x 5,000 = $150,000 before tax, and it's lost if they lapse.

Wash sales run in reverse: here the date of a purchase can cancel a loss. The IRS disallows a loss on company stock if you acquire substantially identical shares within 30 days on either side of the sale. An ESPP purchase or an RSU vest can count as that acquisition, so the risky window spans 61 days around each one.

A disallowed loss isn't gone. It raises the basis of the replacement shares, so you recover it when you sell those. But it can't offset this year's gains.

Your stock plan portal shows vest and ESPP purchase dates months ahead. Put them on the same calendar as your company's trading windows.

Myths that keep executives holding too long

Myth: selling RSUs right after vest means paying tax twice. The vest income is taxed once, and a sale at the vest price adds no gain.

Myth: waiting a year turns RSU income into capital gains. Only the post-vest change is a capital gain, at any holding period.

Myth: a stable, well-run company won't fall far. The evidence on single stocks shows wide swings even for strong firms, and your salary, bonus and unvested awards ride on the same company.

Myth: selling looks disloyal. Your ownership guidelines spell out the required holding, and shares above it are yours to diversify. (Our page on ownership guidelines covers that in more depth.)

Holding company stock vs selling: what each choice gives you

Neither choice is free. Here is what each one gives you and what it costs, in two lists.

A 10b5-1 plan can set up sales in advance; our page on those plans explains how they work.

• Holding, for: no tax on low-basis shares today.
• Holding, for: shares count toward a 5x-salary guideline.
• Holding, for: low-basis shares held until death generally get a stepped-up basis.
• Holding, against: wages, bonus, unvested RSUs and stock all depend on one employer.
• Holding, against: trading windows and pre-clearance mean you can't react quickly.
• Selling, for: diversification.
• Selling, for: high-basis lots can often be sold for little or no tax.
• Selling, for: the cash can go into a broad portfolio built on long-term evidence, not forecasts.
• Selling, against: low-basis lots trigger capital gains.
• Selling, against: insiders sell only in open windows or through a 10b5-1 plan.

How do these mistakes change with age and portfolio size?

The cost of a lot mistake grows with the size of the position and shrinks as your basis rises. In your 40s, selling near each vest is cheapest, because that lot's basis nearly equals its price. By your 50s lot order matters most, and in your 70s a deliberate hold can make sense.

In your 40s, with years of vests ahead, each new vest adds a high-basis lot, so selling near vest is the cheapest moment to diversify. Executives who never sell end up holding mostly low-basis shares later.

At 51, like Natalie, lot order matters most because she is planning two years of sales. Selling high-basis lots first keeps the tax on early sales low while she cuts her $1.3 million position.

In your 70s, or with serious health concerns, keeping some low-basis shares for heirs can make sense because of the basis step-up at death. This is the one case where holding is a deliberate tax choice.

Size matters too. With $150,000 of company stock in a $3 million net worth, a lot mistake costs a few thousand dollars. At $1.3 million it costs tens of thousands.

One honest limit: choosing lots only defers gains on low-basis shares. It helps little if all your shares have a low basis. And we haven't covered how to design a 10b5-1 plan or what your trading window allows, since those depend on your company's policy and its counsel.

What should you do this week if you've never sold a share?

Start with the paperwork: four tasks, none of which involves selling anything. Together they take an evening.

The rule to apply afterward: before any sale, compare the estimated tax on each lot and tell the broker in writing which lot to sell. Recently vested RSU shares are usually cheapest, unless you'd rather keep low-basis shares to donate or pass on.

• Download the lot detail (grant, vest date, shares, basis) from your stock plan administrator's portal.
• Write down the expiration date of every option grant and the post-termination exercise window in your plan document.
• Mark each ESPP purchase date and vest date, plus 30 days on either side, before planning any loss sale.
• Ask your broker to switch the lot method to specific identification, and get the next trading window dates from your legal or compliance team.

Questions your advisor should answer before any sale

Mariner Wealth Advisors answers these in writing in a one-page lot summary. Ask them of anyone you hire.

If you'd like help, Mariner Wealth Advisors meets clients by video and phone, and you can use the request form to ask for a first conversation. Related topics we cover include concentrated stock planning, equity compensation advice and RSU withholding shortfalls.

• Which lot is this sale coming from, and what is the estimated tax on that lot compared with the next-best lot?
• Is there an ESPP purchase or RSU vest within 30 days, and does that matter for this sale?
• What is my total company exposure across RSUs, options, ESPP, 401(k) stock and deferred comp tied to company shares?
• Would donating appreciated shares beat writing a check this year, and which lot would you give?