Tender Offer Tax: How Selling Private Shares Is Taxed

Tender offer tax depends on what you sell: shares held over a year qualify for long-term capital gains (0/15/20%), but proceeds above your 409A price can be taxed as ordinary income up to 37% plus FICA. ISOs may trigger AMT; NSO and RSU sales mix ordinary income and capital gains.

A tender offer can feel like found money — a private company invites you to sell vested shares for real cash, often years before any IPO. But the IRS treats that sale like any other disposition, and the way your proceeds split between capital gains and ordinary income can swing your take-home by tens of thousands of dollars. This guide walks through exactly how a secondary sale is taxed by share type, with worked dollar examples and the traps that catch ISO holders most often.

How is a tender offer taxed?

A tender offer is taxed as a disposition — selling your shares is a taxable event, not a tax-free liquidity grant. Your proceeds fall into two buckets: a capital-gains bucket (the appreciation on stock you already own and have held) and an ordinary-income bucket (any value the IRS treats as compensation for your work). The mix depends on what kind of equity you hold and how long you've held it.

The split matters because the rates are so far apart. Long-term capital gains top out at 20% for the highest earners, while ordinary compensation income can hit 37% federal plus FICA — and employer-stock income is compensation under IRS Publication 525. The IRS draws the line between "statutory" options (ISOs) and "nonstatutory" options (NSOs) precisely so it can tax them at different times and in different buckets.

If you've never seen how equity income threads onto your return in the first place, our explainer on how equity comp flows onto your return is a useful primer before you read on.

Tender offer vs secondary sale — what's the difference?

A tender offer is one specific type of secondary sale: a company-organized, structured opportunity for many shareholders to sell at a single set price within a fixed window. As the corporate attorneys at Gunderson Dettmer put it:

"All tender offers are secondary sales, but not all secondary sales are tender offers." — Gunderson Dettmer, Secondary Sales and Tender Offers

The distinction matters for tax because of who runs the transaction and who's invited. In a one-off investor-to-investor secondary sale, you're typically selling at a negotiated price to an outside buyer, and the gain is usually straightforward capital gain. In a company-run tender offer — especially one open only to current and former employees — the price the company sets can be scrutinized against the 409A valuation, raising the risk that part of your proceeds is recharacterized as compensation.

A tender offer also runs on a clock. Offers typically stay open for around three weeks, which means the tax decision is real-time, not something you can defer indefinitely. If your liquidity event is tied to going public instead, the mechanics differ again — see our guide to tax treatment around an IPO lock-up.

How your shares are taxed by equity type

Your tax bill in a tender offer is driven first and foremost by what kind of shares you're selling. ISO-acquired shares, NSO-acquired shares, RSU-vested shares, and stock you bought outright each follow different rules for when income is recognized and at what rate. Here's the breakdown.

ISO-acquired shares

ISO shares get the best potential treatment — if you clear two holding-period hurdles. To get a qualifying disposition (entirely long-term capital gain on the spread), you must hold the shares more than 2 years from grant AND more than 1 year from exercise. Sell into a tender offer before clearing both, and it's a disqualifying disposition: the bargain element at exercise becomes ordinary income, just like an NSO.

The qualifying-disposition holding rule comes straight from IRS Publication 525. There's a second wrinkle unique to ISOs: if you haven't exercised yet, you have no shares to tender — and exercising is its own AMT event in the same year. We model that double-hit in detail below. For the full rules on what flips an ISO into ordinary-income treatment, see our guide to a disqualifying disposition.

NSO-acquired shares

NSO shares carry their ordinary-income tax up front, at exercise. When you exercise an NSO, the spread between strike price and fair market value is ordinary income on your W-2 that year. In the IRS's own words, for a nonstatutory option without a readily determinable value:

"you must include in income the fair market value of the stock received on exercise, less the amount paid, when you exercise the option." — IRS Tax Topic 427, Stock Options

After exercise, only the post-exercise appreciation is a capital gain when you sell into the tender. So if you exercised NSOs years ago and the stock has climbed since, the tender mostly produces capital gain — but if the tender price sits above your 409A and the offer is employee-only, watch for the compensatory-income recharacterization covered below.

RSU-vested shares

RSU shares already had their ordinary-income moment at vesting. RSUs are taxed as ordinary income on the full fair market value at vest (IRS Publication 525), and that vest-date value becomes your cost basis. When you tender RSU shares, your taxable gain is simply the tender price minus that vest-date basis — short-term if you've held under a year, long-term if over.

A common error: forgetting that you already paid ordinary tax at vesting and double-counting it as a gain. For the mechanics, see our guide to how RSUs are taxed at vesting.

Shares owned outright

Shares you bought with cash (founder stock, early-exercised and fully vested shares, secondary purchases) are pure capital assets. Selling them in a tender produces only capital gain or loss — short-term if held one year or less, long-term otherwise. As the IRS states plainly:

"If you hold it one year or less, your capital gain or loss is short-term." — IRS Tax Topic 409, Capital Gains and Losses

The chart below contrasts the after-tax math for ISO-acquired versus NSO-acquired shares on a typical grant, which is the decision most tender participants are wrestling with.

The takeaway: when you can hold ISO shares into a qualifying disposition, the capital-gains treatment can save you tens of thousands versus the ordinary-income path an NSO (or a disqualified ISO) forces. For a deeper look at how ISOs and NSOs are taxed differently, read our full comparison.

When are tender offer proceeds taxed as ordinary income? (the 409A trap)

Tender proceeds get taxed as ordinary income when the IRS decides part of your price is really compensation for your work rather than a return on your investment — and the dividing line is your company's 409A valuation. If the company buys your shares at a price above the most recent 409A fair market value, the slice above 409A can be characterized as wages, not capital gain.

Two factors make this recharacterization more likely. First, the spread above 409A: the bigger the gap between the tender price and the 409A, the harder it is to argue the premium is anything but compensation. Second, who's invited. As tax attorneys at Fenwick & West explain in an interview with Founders Circle, including non-employee shareholders in the offer at the same price helps support the position that the price reflects fair market value rather than compensation — whereas an employee-only offer above 409A strengthens the argument that the premium is wages (Founders Circle / Fenwick & West).

The chart below shows how a 409A valuation climbs across funding stages — the rising line is exactly the threshold that determines how much of any tender premium is "above 409A."

The visual makes the trap concrete: a tender priced well above the current 409A line means a larger ordinary-income slice. And that slice doesn't just get hit with income tax.

The AMT trap when you exercise ISOs to participate

If your ISOs are unexercised, you have to exercise them to have shares to tender — and that exercise is a separate AMT event landing in the same tax year as your cash. Exercising an ISO and holding the shares isn't a regular-tax event, but the bargain element (FMV minus strike) is an AMT preference item under the alternative minimum tax system. So you can receive a check from the tender and still owe AMT triggered by the exercise that made the tender possible.

Here's a mini-example. Say you exercise 10,000 ISOs at a $2 strike when the FMV is $10, then tender shares you already held. The exercise creates $80,000 of AMT preference income (10,000 × $8). For a single filer, that can produce roughly $15,000–$20,000 of AMT — due the following April, with no withholding to cover it, even though your tender cash arrived months earlier.

The chart below compares ISO exercise strategies and the total tax each produces, so you can see how staging exercises changes the AMT picture.

Spreading exercises across tax years to stay near your AMT-free limit is the standard fix — the same logic behind exercising your options before a liquidity event. And because AMT has no withholding, you'll likely owe estimated tax payments after an ISO exercise; skipping them can trigger penalties. For the full mechanics of the parallel tax, see our Alternative Minimum Tax (AMT) guide.

A worked example: splitting a tender payout into ordinary income and capital gains

Let's put real numbers on the 409A split. Suppose you hold 10,000 shares from an early NSO exercise: your strike price was $2, the most recent 409A is $10, and the company's tender offer pays $15 per share. Your total proceeds are $150,000. Because your basis is $10/share — the $2 strike plus the $8 spread already taxed as ordinary income at exercise — your gain over basis is $5/share, or $50,000. Here's how it breaks down:

Here's how the per-share gain splits, assuming the offer is employee-only and the above-409A premium is treated as compensation:

In this employee-only structure, the $50,000 above-409A premium is taxed as ordinary income — say $18,500 in federal income tax at the 37% bracket, plus roughly $3,825 in FICA — versus the $10,000 it would cost at the 20% long-term rate. That's a ~$12,000 swing on this slice alone from the recharacterization. Your cost basis here is the $2 strike plus the $8 already taxed at exercise — see our explainer on your strike (exercise) price for why prior-taxed income lifts your basis.

High earners owe more still. The 3.8% Net Investment Income Tax applies to capital gains above $200,000 MAGI (single) / $250,000 (MFJ) (IRS Tax Topic 559), so a large long-term slice could carry an extra 3.8% on top of the 20% rate.

Sell or hold? A decision framework for the tender window

Deciding whether to sell into a tender offer or hold your shares is a four-step decision: figure out your after-tax proceeds per share, weigh that against your concentration risk, check what holding longer would change, and confirm you have cash to cover any tax the participation itself creates. The tax mechanics above tell you the cost of selling; this framework turns that cost into a sell/hold call.

Run the steps in order:

1. Compute your after-tax cash per share. Take the tender price, subtract the tax bucket each slice falls into. In the worked example above, the $15 tender price on shares with a $10 basis nets roughly $12.77/share after the ordinary-income-plus-FICA hit on the above-409A premium — not the headline $15. Always decide on the after-tax number, never the gross.
2. Size your concentration risk. If this one private stock is more than ~10% of your net worth, the diversification case for selling is strong regardless of tax — a single pre-IPO company can go to zero. If it's a small slice, you have room to hold for better tax treatment.
3. Check what waiting buys you. Are you about to cross the 1-year/2-year ISO marks for a qualifying disposition, or a holding-period line that moves a slice from ordinary income to the 0/15/20% long-term rate? If a few months flips a large slice from 37% to 20%, partial participation now plus a later sale can beat selling everything today.
4. Confirm cash for the tax. If you must exercise ISOs to have shares to tender, the exercise triggers AMT next April with no withholding (see above). Selling only enough in the tender to cover that AMT — and holding the rest — is a common, deliberate structure.

A worked sell/hold split on 10,000 shares: tendering half (5,000 shares) at the $15 price raises cash and locks in $25,000 of the gain now, while the remaining 5,000 keep running toward a possible qualifying disposition or IPO — capping your downside without forfeiting all the upside. Model your own split before the window closes.

Should you participate? Tax cost vs. diversification

Whether to tender comes down to weighing diversification and certainty against tax cost and upside — and there's no universal answer. Selling locks in real cash and reduces your single-stock concentration risk, but it also triggers the tax above and forfeits future appreciation if the company keeps climbing.

A few factors to weigh before the (typically ~3-week) window closes:

• Holding-period status. Are you past the 1-year/2-year ISO marks for long-term capital gains, or would tendering now trigger a disqualifying disposition?
• The above-409A slice. How much of your price is compensation income plus FICA versus capital gain?
• Concentration. What share of your net worth is in this one private stock?
• Cash to cover tax. If you must exercise ISOs to participate, do you have cash for the AMT that lands next April?
• QSBS potential. Qualified Small Business Stock held more than 5 years may exclude a large portion of federal gain — tendering early can forfeit that, so check eligibility first.

This is a timing decision as much as a tax one. Our guide on timing your exercise digs into the trade-offs, and a tax professional can pressure-test your specific numbers. None of this is individual tax advice — consult a qualified advisor before you tender.

Frequently asked questions

Are tender offer proceeds taxed as ordinary income or capital gains?

Both can apply. Gain on shares you've held more than a year is long-term capital gain (0/15/20%), but any portion of the tender price above your company's 409A valuation may be taxed as ordinary compensation income up to 37% plus FICA. The split depends on your share type and how the offer is structured.

Do I pay FICA / payroll tax on a tender offer?

Only on the portion treated as compensation income — the above-409A slice, or the ordinary-income component of an NSO or RSU sale. Pure capital gains never carry FICA. Expect roughly 7.65% combined Social Security and Medicare on the compensation slice, plus the 0.9% Additional Medicare Tax above $200,000 (single).

How does a tender offer affect my cost basis?

Your basis is what you paid plus any amount already taxed as income — typically your strike price plus any spread already reported as ordinary income at exercise (or vest-date FMV for RSUs). Your taxable gain is the tender price minus that basis.

Does exercising ISOs for a tender offer trigger AMT?

Yes. Exercising ISOs creates an AMT adjustment in the exercise year — the bargain element is an AMT preference item — separate from the sale itself, even though you also receive cash from the tender (IRS Tax Topic 427). There's no withholding on AMT, so plan for the bill the following April.

What's the difference between a tender offer and a secondary sale for taxes?

A tender offer is one type of secondary sale. The disposition rules are the same, but company-run tender offers priced above 409A — especially employee-only ones — raise the risk that part of your proceeds is recharacterized as compensation income rather than capital gain.

Run your own tender offer tax numbers

Every tender offer is different, and the 409A split, holding periods, and AMT interaction all turn on your specific grant. Model your scenario with our calculators before you commit — and if you're juggling ISO exercises across years, our multi-year planner helps you stage them to minimize AMT.