For employees of a private company holding non-qualified stock options. Compare exercising none, some, or all of your vested options — including Washington’s capital gains tax and the proposed high-earner income tax beginning in 2028.
| Line item | Exercise none | Your scenario | Exercise all vested |
|---|
This reproduces the settlement mechanics of the company’s option model: the cash portion is settled by the company net of withholding, and its proceeds can fund the strike price and taxes on the shares you keep. A positive net payable means cash comes back to you; a negative figure means you must write a check.
| Settlement line | Sold back for cash | Exercised & kept as stock | Combined |
|---|
Employers withhold supplemental wages at a flat 22% up to $1,000,000 of supplemental pay in a calendar year, and 37% on everything above that. Your true marginal rate is usually higher than 22%, so a large exercise often creates a surprise balance due in April plus underpayment penalties.
Supplemental wages are a subset of your pay, not a separate income stream. Regular salary runs through payroll on a normal schedule. Supplemental wages are the irregular pieces — a bonus, commission, RSU vesting, or an earlier option exercise — and they are withheld under different rules.
Enter the same dollars in both places. The salary and bonus box is your total expected W-2 income for the year, and drives the actual tax. This box is the portion of that total which is supplemental and has already been paid. A $500,000 earner who received a $50,000 bonus in March enters $500,000 above and $50,000 here — not $550,000. It is not added to your income.
It only changes withholding, never the tax you owe. The flat 22% rate applies to the first $1,000,000 of supplemental wages in a calendar year; above that the rate jumps to 37%. Amounts already paid consume part of that $1,000,000 allowance, so an exercise later in the year can cross into 37% sooner than expected. Your final tax bill is unaffected — withholding is only a prepayment — but the cash timing, the April balance, and any underpayment penalty all shift.
Where to find it: your most recent pay stub, usually as a year-to-date bonus or supplemental earnings line. Leave it at zero if you have had no bonus or other irregular pay this year.
Every strategy starts from the same cash position. The How it is funded column shows where the money for each exercise comes from — your outside savings, the options themselves, or borrowing. Cash not spent is invested in the outside portfolio and taxed as long-term capital gains at the horizon. Options still unexercised at the horizon are exercised then, as ordinary income.
| Strategy | How it is funded | Cash out of pocket today | Tax paid today | Company stock at horizon | Outside portfolio | Tax at horizon | Net after-tax |
|---|
Exercising a fixed amount of spread each year keeps income under the Washington threshold and out of the top federal bracket. Newly vested options join the pool each year.
| Year | Share price | Options | Spread recognized | Federal tax | WA tax | FICA | Total tax | Eff. rate |
|---|
Exercises the same number of options you selected above, every year, until the position is exhausted. Select “exercise all vested” to see a single large exercise instead.
| Year | Share price | Options | Spread recognized | Federal tax | WA tax | FICA | Total tax | Eff. rate |
|---|
| Side by side | Ladder A — to ceiling | Ladder B — your selection | Difference |
|---|
Concentration risk. Options and shares in one private company are a single-security bet that is also correlated with your paycheck. If the company fails, your salary and your savings fail together. Your primary residence is excluded from this calculation — it cannot be sold to meet a margin of safety and does not diversify an equity position.
“At risk if shares go to zero” is the cash you would permanently lose if the company failed after you exercised. It is the strike price you paid the company, plus the income tax you paid on the paper spread — money that has already left your pocket and bought an asset now worth nothing. Two things make this worse than an ordinary investment loss. First, the tax is not refunded: you paid ordinary income tax on a gain you never realized in cash. Second, the resulting capital loss can offset only $3,000 of ordinary income per year, so recovering the benefit could take decades. By contrast, if you had never exercised, an unexercised option simply expires worthless and costs you nothing. This figure is the price of converting an option into stock — and the reason exercising to hold is a genuine risk decision, not merely a tax decision.
Liquidity risk. Exercising to hold converts liquid cash into an asset you generally cannot sell. You pay real tax today on paper gains. If the share price later falls below your exercise price, that tax is not refunded — the loss becomes a capital loss usable only $3,000 per year against ordinary income.
Policy risk. Waiting is a bet that tax law will not get worse. The Washington proposal is that risk materializing; the future federal rate toggle in section 4 lets you price it.
Deferral value. An unexercised option is an unfunded, tax-deferred claim on the full share price — you capture 100% of the appreciation having invested nothing. That leverage is the single largest force in this model.
Employment risk. Vesting requires continuous service. Leaving stops vesting, and post-termination exercise windows in the plan may override the absence of a fixed expiration date.
“No expiration date” holds only while you remain employed. Leaving starts a short clock: the vested options must be exercised inside the post-termination window or they terminate. This models that forced lump.
| Outcome | Options forced | Spread recognized | Total tax | Effective rate | Net after tax |
|---|
A typical plan expires the option on the earliest of several events, and the post-termination windows below are the common pattern. Confirm the exact figures against your own grant notice, stock option agreement, and plan — they govern, not this tool.
For Cause — immediate. The option terminates the moment service ends and is no longer exercisable. Every unexercised option, vested or not, is lost. Shares already purchased may also be repurchasable by the company at their original purchase price rather than fair market value.
Two documents, one answer. The plan sets outer limits; your individual Option Agreement sets the actual terms. Where the agreement is silent the plan’s fallback applies — commonly three months for an ordinary separation, twelve for disability or death. Where the agreement specifies something else, that controls. Two colleagues at the same company can hold grants with very different windows, so read the grant, not just the plan.
Any other reason — commonly three months. Vested options only, and only to the extent exercisable on the termination date.
Disability — twelve months. Again limited to what was vested and exercisable as of the termination date.
Death — eighteen months. The option may be exercised by the estate, by someone who acquired the right by bequest or inheritance, or by a designated beneficiary — but, in the standard formulation, only “to the extent the Optionholder was entitled to exercise such Option as of the date of death.” That language means the vested portion only; death does not itself accelerate vesting. Acceleration typically requires a change in control or an affirmative board action, so the toggle above is off unless you turn it on.
Unvested options are forfeited in every case, because vesting ceases when continuous service ends.
Important disclosures. This tool is provided for illustration and education only. It is not tax, legal, accounting, or investment advice, and nothing here is a recommendation to exercise, hold, or sell any security. Hypothetical results are not a guarantee of future performance.
Federal brackets, standard deductions, capital gains thresholds, and the Social Security wage base reflect 2026 figures and are inflated 3% per year thereafter. The Washington income tax modeled here is proposed and subject to litigation — it is not current law. Any future federal rate change you enable is a user-defined hypothetical, not enacted law. Not modeled: AMT, state credits, ISO treatment, 83(b) elections, itemized deductions, charitable planning, deferred compensation, estate tax, company repurchase limits, transfer restrictions, and post-termination exercise windows. Company share growth is a hypothetical assumption, not a projection; private company shares are illiquid and may become worthless.
Figures are estimates and will differ from your actual return. Consult your own CPA, attorney, and financial advisor before acting.
Disclosures
Advisory services are offered through XYPN Sapphire and its various IAR brands under which it operates. XYPN Sapphire is an SEC registered investment adviser. For additional disclosure and privacy information, please visit XYPNSapphire.com/disclosures
Informational Purpose Only:
This financial plan is provided for informational, illustration, and discussion purposes only. It should not be construed as financial, legal, tax, or investment advice, nor as a recommendation to implement any specific strategy, product, or investment. This plan should only be used in conjunction with active, personalized advice from relevant professionals like your financial advisor and should not be used independently of such interactive, personalized advice.
Assumptions and Hypothetical Nature:
The projections, illustrations, and calculations in this report are based on information provided by you and on assumptions regarding future events. These assumptions may not occur as expected, and actual results may differ—perhaps materially—from those shown. All examples are hypothetical and for illustrative purposes only. Any discussion of historical performance does not indicate the likelihood of future results.
Forward-Looking Statements:
This material may include forward-looking statements, estimates, or projections. Such statements are subject to numerous risks and uncertainties, and no representation is made regarding the likelihood of their occurrence. Changes in assumptions could produce materially different results. Tools such as Monte Carlo simulations generate results by modeling numerous economic scenarios. These results are illustrative only, not predictive, and outcomes will vary with different inputs and market conditions.
No Professional Advice:
This material itself (on its own) does not constitute legal, tax, or accounting advice. You should consult qualified professionals before making any decisions regarding your financial, legal, or tax situation.
Data and Accuracy Limitations:
Due to the limitations of modeling and available information, this report may not reflect all holdings, transactions, costs, or proceeds. Prices, values, and other data are obtained from sources deemed reliable at the time of use. but accuracy is not guaranteed. Results may vary based on calculation methodologies or assumptions. Always compare this report with official custodian or product statements.
Liability and Use:
This material is provided solely for your personal use and may not be relied upon by third parties without prior written consent from XYPN Sapphire. XYPN Sapphire and your investment advisor representative accept no liability for any loss arising from actions taken or not taken based on this material, except where prohibited by applicable law.