Broker Check
(909) 929-7212
opinder@rysefinancial.com
Login

How to Handle Your RSUs and Stock Options When You're Laid Off

July 19, 2026

For tech employees, equity compensation isn't a perk on the side — it's often 30–60% of total pay. And when a layoff hits, equity is where the tightest deadlines and the biggest money live. Miss a 90-day exercise window and six figures in vested options vanish. Exercise without understanding the tax consequences and you could owe the IRS more than you received in severance.

The short answer: When you're laid off, unvested RSUs and options are almost always forfeited. Vested RSUs that have already been delivered to you are yours — nothing changes. But vested stock options typically come with a post-termination exercise window of just 90 days, after which unexercised options disappear permanently. Whether to exercise — and how — depends on the option type (ISO vs. NSO), the spread, your tax situation in the layoff year, and whether the exercise triggers the Alternative Minimum Tax.

Step 1: Know what you have

Before you can make a decision, you need to know exactly what's on the table. Pull your equity grant documents (your stock plan portal — Fidelity, Schwab, E*Trade, Carta, etc.) and catalog every grant. For each one, write down:

  • Grant type: ISO, NSO, RSU, or ESPP
  • Vested vs. unvested: How many shares/options are vested as of your last day?
  • Strike price (for options): What you'd pay per share to exercise
  • Current fair market value: What the shares are trading at today (public company) or the most recent 409A valuation (private company)
  • The spread: FMV minus strike price — this is the taxable amount
  • Post-termination exercise period: Usually 90 days, but check your plan — some companies give 30 days, others (rarely) give up to a year

If you have RSUs that have already vested and been delivered, those shares are in your brokerage account. They were taxed as W-2 income when they vested — you already paid. The layoff doesn't change their status. What it does change is whether you should still be holding that much company stock, especially now that your paycheck from that company is gone. More on that below.

Step 2: Understand the 90-day clock

Most stock option plans give you 90 calendar days from your last day of employment to exercise vested options. This is not a soft deadline — it's a hard cutoff. On day 91, unexercised options are canceled. The shares you earned over years of vesting simply stop existing.

Three things to know about this window:

  • It starts on your termination date, not when you find out about the layoff or when your severance ends. If your last day is July 15, the window closes around October 13.
  • The window can be shorter. Some plans specify 30 or 60 days. Others give extended windows for certain circumstances. Your grant agreement controls — not what HR tells you verbally.
  • ISOs convert to NSOs after 90 days. Even if your plan gives you a longer window (say, 6 months), any ISOs exercised more than 90 days after termination automatically lose their ISO tax status and are treated as NSOs. This is an IRS rule, not a company rule.

Step 3: ISO vs. NSO — why the option type changes everything

The tax treatment of your exercise depends entirely on whether your options are Incentive Stock Options (ISOs) or Non-Qualified Stock Options (NSOs). Most tech employees have one or both — and they're taxed in fundamentally different ways.

NSOs: Simpler, but taxed harder at exercise

When you exercise NSOs, the spread (FMV minus strike price) is immediately taxed as ordinary income — it shows up on your W-2 just like wages. Your company (or former company's plan administrator) withholds federal, state, and FICA taxes at exercise. In California, where the top marginal rate is 13.3% and there's no preferential treatment for any type of equity income, a large NSO exercise can easily face a combined marginal rate above 50%.

The upside of NSOs in a layoff year: because the tax hit happens at exercise, you know exactly what you owe. There's no AMT surprise. And if your layoff-year income is lower than usual, you may exercise into a lower marginal bracket than you would in a normal earning year.

ISOs: Better potential tax outcome, but the AMT trap is real

When you exercise ISOs, there is no regular federal income tax at exercise. If you hold the shares for at least one year after exercise and two years after the grant date (a "qualifying disposition"), the entire gain is taxed at long-term capital gains rates when you eventually sell — 20% federal at the top bracket versus 37% for ordinary income. That's a meaningful difference on a large spread.

But here's what catches people: the spread at exercise is an Alternative Minimum Tax (AMT) preference item. The AMT is a parallel tax calculation — you compute your tax both ways and pay whichever is higher. For 2026, the AMT exemption is $90,100 for single filers and $140,200 for married filing jointly. If a large ISO exercise pushes your alternative minimum taxable income above those thresholds, you could owe AMT — a real tax bill — on stock you haven't sold yet, paid with cash you may not have.

Under the One Big Beautiful Bill Act (OBBBA), the AMT exemption phase-out thresholds dropped starting in 2026 (to $500,000 single / $1M married filing jointly) and the phase-out rate doubled, meaning more high-income taxpayers will lose their exemption faster. If you have a significant ISO exercise, model the AMT impact before you pull the trigger.

One important California note: California does not follow federal ISO rules. For California state income tax purposes, ISO exercises are treated as ordinary income — taxed at up to 13.3% in the year of exercise, regardless of holding period. This means the ISO advantage is purely a federal benefit. California residents exercising ISOs get hit with state tax either way.

Step 4: Should you exercise? A decision framework

The exercise decision depends on four variables working together:

1. Is the spread positive? If the current FMV is below your strike price, the options are "underwater" — worthless to exercise. Let them expire. (This is cold comfort, but at least you don't lose cash.)

2. Can you afford the cash outlay? Exercising means paying the strike price times the number of shares, plus enough liquidity to cover any tax withholding. On 5,000 options with a $10 strike, that's $50,000 in cash just for the exercise, before any tax. If you can't fund it, explore whether a cashless (same-day sale) exercise is possible — you exercise and immediately sell, using the proceeds to cover the cost. The trade-off: a same-day sale of ISOs is a disqualifying disposition, which means the spread is taxed as ordinary income (like an NSO). You lose the ISO advantage but avoid the cash crunch and AMT risk.

3. What's your AMT exposure? If the options are ISOs and the spread is large, run the numbers before exercising. In some cases, exercising ISOs in a low-income layoff year actually reduces AMT exposure compared to a normal year — because your regular income is lower and the AMT exemption protects more of the spread. In other cases, the exercise pushes you deep into AMT territory. This is not something to guess at. Our post on tax strategies for high earners covers the bracket math in more detail.

4. What's your concentration risk? Even if exercising is tax-smart, ask yourself: after exercising, what percentage of your net worth is tied to one company's stock? If the answer is more than 10–15%, you're taking on significant single-stock risk — and you no longer have the income diversification of a paycheck from that employer. We've written extensively about building a systematic de-risking plan for concentrated positions.

What about your vested RSU shares?

If you have RSUs that vested while you were employed, those shares are already in your brokerage account. The layoff doesn't put them at risk. But it does change the calculus on whether to keep holding.

When you were employed, holding company stock might have felt like a bet on your own team. Now that you've been laid off, that stock is just a position — and one with zero diversification benefit to a career that was already dependent on the same company. If managing the tax on your RSU sales has been on the back burner, a layoff is the moment to move it to the front.

Key considerations:

  • Cost basis and holding period: Shares held more than one year from vest get long-term capital gains treatment on any appreciation above the vest-date FMV. Shares held less than a year are short-term gains (ordinary income rates). If you're close to the one-year mark, the math might favor waiting.
  • Tax-loss harvesting opportunity: If the stock has dropped below your vest-date basis, selling captures a capital loss you can use to offset gains elsewhere — or up to $3,000 of ordinary income per year, with the rest carrying forward. A layoff year where you're also doing Roth conversions is a great time to pair TLH with a conversion.
  • 10b5-1 plans: If you had a pre-set trading plan, it likely terminated when your employment ended. Don't assume old selling instructions are still active — confirm with your broker.

Private company options: a harder problem

If you were laid off from a private (pre-IPO) company, the exercise decision gets more complex because there's no public market to sell into. You're paying real cash to exercise options for shares you can't easily liquidate.

Things that change with private company equity:

  • The FMV is a 409A valuation, not a market price. It may be stale — valuations are typically done annually or at financing events. The "real" value could be higher or lower.
  • There may be no liquidity. Secondary markets (like Forge or EquityZen) exist for some later-stage companies, but they're illiquid, require company consent, and often come with large discounts.
  • Early exercise with an 83(b) election may have been available when you joined — if you made one, your tax basis is locked in at the (lower) exercise-date FMV and the clock on long-term capital gains started running. If you didn't, you may face ordinary income on the full spread at exercise.
  • Company ROFR (right of first refusal): Even if you exercise, the company can often buy the shares back. Read the shareholder agreement.

The fundamental question with private company options: do you believe this company will have a liquidity event (IPO or acquisition) that makes the shares worth significantly more than the exercise cost plus taxes? If yes, and if you can afford the cash outlay without it hurting your financial stability during a job search, exercising might be justified. If you're not confident in either of those, letting underwater or low-spread options expire is a defensible choice.

The bottom line: sequence matters

Your equity decisions after a layoff interact with everything else: your 401(k) rollover, your Roth conversion window, your tax-loss harvesting, and your overall investment strategy. Exercising options in the same year you're converting a 401(k) to a Roth can push you into a higher bracket than either move alone. Selling RSU shares at a loss in a year where you're also exercising options at a gain is a net-positive tax move — but only if you coordinate the timing.

This is the kind of planning where the sequence is the strategy. And a low-income transition year is a rare window — it doesn't stay open long.

Don't let a deadline make the decision for you. If you've been laid off and you're holding vested options with a 90-day clock, the time to model the tax impact is now — not on day 85. RYSE Financial helps tech employees navigate equity decisions at career transitions, coordinating the exercise, tax, and diversification pieces together. Schedule a free consultation.

Frequently asked questions

What happens to my stock options if I get laid off?

Unvested options are typically forfeited on your last day. Vested options usually come with a post-termination exercise window — most commonly 90 days — after which unexercised options expire permanently. Check your grant agreement for the exact deadline.

What happens to my RSUs if I get laid off?

Unvested RSUs are almost always forfeited. RSUs that already vested and were delivered to you as shares are yours — the layoff doesn't change that. You keep the shares and can sell them whenever you choose, subject to any trading restrictions that may still apply.

What is the difference between ISO and NSO tax treatment?

NSOs are taxed as ordinary income at exercise on the spread (FMV minus strike price). ISOs have no regular income tax at exercise, but the spread is an AMT preference item that can trigger the Alternative Minimum Tax. If you hold ISO shares for at least one year after exercise and two years after grant, the gain at sale is taxed at lower long-term capital gains rates. California does not follow federal ISO rules — the state taxes ISO exercises as ordinary income regardless of holding period.

Should I exercise my stock options after a layoff?

It depends on the spread, your cash reserves, the option type (ISO vs. NSO), your AMT exposure, and your overall tax picture for the year. If the spread is positive and you can afford the cash outlay and tax, exercising often makes sense — especially in a low-income layoff year where your marginal rate is lower than usual. Model the numbers before the deadline, not after.

What is the AMT trap with ISOs?

When you exercise ISOs, the spread is added to your alternative minimum taxable income. If this pushes your AMT calculation above your regular tax, you owe AMT — a real tax bill on stock you haven't sold. For 2026, the AMT exemption is $90,100 (single) or $140,200 (married filing jointly), with phase-outs starting at $500,000 / $1,000,000. Large ISO exercises can trigger five- or six-figure AMT bills. Any AMT paid becomes a credit you can recover in future years, but recovery is slow.

Sources

This material is for general information only and is not intended as tax, legal, or investment advice. Tax rules, exemption amounts, and bracket thresholds cited are current as of 2026 and subject to change. Hypothetical scenarios are for illustrative purposes only and do not represent any specific individual's situation. Please consult a qualified tax or legal professional regarding your individual circumstances.