Key Takeaways
- California has repeatedly proposed wealth-style taxes based on asset value not liquidity, with the most recent proposal tied to residency and fixed valuation dates.
- If you hold ISOs, exercised shares (especially in private or late-stage companies) could create tax exposure before any liquidity event occurs.
- A wealth tax would not replace existing ISO rules. It would layer on top of AMT and income tax, increasing the risk of cash-flow compression.
- How assets are valued, when tax is due, and the cost of deferring payment mean the headline rate may understate the real impact for illiquid equity.
California’s Wealth Tax Proposals: What ISO Holders Need to Know
For decades, equity compensation planning has operated on a simple premise: tax generally follows liquidity. You owe tax when you realize a gain. But, California’s recurring wealth tax proposals challenge that assumption.
Since 2020, lawmakers have introduced multiple versions of wealth-style taxes aimed at high-net-worth residents. While thresholds and rates differ, the underlying structure has remained consistent: tax will be calculated based on asset value, not on whether you sell or receive cash.
Key proposals have included:
- AB 2088 (2020): A 0.4% annual tax on worldwide net worth above $30 million
- AB 259 and ACA 3 (2023): Annual taxes ranging from 1% to 1.5% on net worth above $50 million to $1 billion
- The 2026 Billionaire Tax Act: A proposed one-time 5% excise tax on individuals with net worth exceeding $1 billion, determined by California residency as of January 1, 2026, and measured using asset values as of December 31, 2026
None of these measures has yet become law. However, repeated reintroduction and ongoing budget pressure make them a real planning consideration. For individuals whose net worth is driven by equity compensation, the mechanics (not the headlines) matter now.
Unrealized Equity vs. Real Liquidity
If you hold ISOs, this is where the risk becomes tangible.
An exercised ISO gives you shares, not cash. On paper, the value may look substantial. In reality, unless there is an IPO, tender offer, or approved secondary sale, those shares may do little to help you cover tax obligations.
Under valuation-based tax proposals, liability can arise even without a sale. Asset values are measured on fixed snapshot dates, illiquid stock may be valued using 409A appraisals or recent funding rounds, and subsequent market declines do not necessarily reduce the tax bill.
The result is a familiar but dangerous mismatch: tax owed without liquidity to pay it. To bridge the gap, some taxpayers may borrow against assets or sell shares under pressure.
Read: Unrealized Gains vs. Real Liquidity: Why California’s Proposal Is a Cash Flow Killer
How ISOs Normally Work Under Current Federal and California Law
Before looking at how a wealth tax could change the landscape, it helps to understand how ISOs are taxed today. This baseline matters because a wealth tax would not replace existing rules – it would be layered on top of an already complex system of federal income tax, California income tax, and alternative minimum tax (AMT).
The ISO lifecycle follows a predictable sequence. It begins at the grant date, when options are awarded at a specific strike price, typically equal to fair market value. Next comes the vesting period, often four years with a one-year cliff. When you exercise, you pay the strike price to acquire shares. When you eventually sell, tax treatment depends on whether holding requirements are met.
Current Federal Treatment of ISOs
Under federal tax rules:
- No regular income tax is due at grant or vest
- The spread at exercise can trigger alternative minimum tax (AMT)
- A qualified disposition (two years from grant and one year from exercise) results in long-term capital gains
- A disqualifying disposition converts the spread to ordinary income
AMT is often the first major cash-flow hurdle. We regularly see clients surprised by tax bills that arise well before any liquidity event, especially during periods of rapid valuation growth.
Current California Treatment
California generally follows the federal framework, but with important differences:
- No regular state income tax at exercise under the standard system
- California historically applied its own AMT, with different calculations than federal AMT
- Capital gains are taxed at ordinary income rates
- California source income rules can apply to equity earned while working in the state, even after you move
If you hold ISOs and have California work history, coordinating across multiple tax regimes should already be part of your tax planning, even before any new tax layer is introduced.
Where a Wealth Tax Breaks the Existing Framework
Under today’s system, your biggest tax timing triggers are tied to decisions you make. For example when you exercise and when you sell. Even AMT is typically tied to a deliberate action: converting options into shares.
A wealth tax shifts that dynamic.
Instead of taxing a transaction, a wealth tax is imposed based on the value of assets you hold on a specified date. If you’ve exercised ISOs (especially in a private or late-stage company) those shares could be pulled into the tax base simply because you still own them.
This is the core issue we flag for equity-compensated clients: once residency and valuation dates are set, liability can become automatic – before liquidity arrives.
Why the Headline Rate May Not Be the Real Rate
Even when a proposal is framed as “5%,” the practical burden can be higher than it sounds, especially for illiquid or hard-to-value holdings.
Here’s why:
- Valuation rules can inflate the tax base (especially for private business interests and concentrated positions)
- Penalties for under-valuation can raise the stakes and drive conservative (higher) reported values
- Deferral isn’t free – installment regimes can add meaningful additional cost
- Tax can be based on a snapshot value even if the asset later drops materially
This matters because ISO-related wealth is often concentrated, volatile, and illiquid – the exact combination that makes valuation-based taxes hardest to manage.
Why AMT and a Wealth Tax Can Stack
If you hold ISOs, you’re already navigating tax stacking.
- AMT may apply in the year you exercise
- Income/capital gains tax applies when you sell
- A wealth tax would add a third layer while you continue to hold shares
In some scenarios, you could face:
- AMT at exercise
- a wealth-based tax while holding
- income/capital gains tax at sale
These taxes don’t replace one another; they accumulate. And when they stack, the pressure isn’t theoretical – it shows up as compressed cash flow and decisions driven by tax mechanics rather than long-term strategy.
Who Is Most Exposed
Wealth tax proposals are often marketed as “billionaire” measures, but exposure is really driven by concentration, valuation and liquidity constraints.
You’re more exposed if:
- you’re a founder or early employee sitting on substantial paper value with limited liquidity
- you’re a late-stage employee whose company stock has become a disproportionate share of net worth
- you hold private company shares where valuation rises faster than liquidity options
The sharper the mismatch between value and cash access, the more disruptive a valuation-based tax becomes.
Why Timing and Residency Suddenly Matter More
Wealth tax proposals typically hinge on:
- residency on a determination date, and
- asset values measured on a separate valuation date
Once those dates exist, planning options narrow quickly.
And California is already aggressive on residency and sourcing. If your ISOs are tied to California work history, “moving” isn’t just about changing an address. Your documentation and timeline matter, and poorly supported exits can be challenged.
What You Can Do Now (Without Overreacting)
The goal isn’t to predict legislation. It’s to build flexibility.
If you hold ISOs, start with a clear inventory:
- grant dates and vesting schedules
- strike prices and current valuations
- AMT exposure under different exercise strategies
- liquidity pathways (tender offers, secondary programs, IPO timelines)
From there, scenario modeling helps you test how different choices perform under different policy outcomes. So you’re not forced into rushed decisions if deadlines appear.
Control Comes From Planning
California’s wealth tax proposals may evolve, stall, or fail, but the policy direction is clear: large, concentrated equity positions are under increasing scrutiny. If you hold ISOs, the real risk isn’t just higher taxes. It’s also losing control over timing and liquidity once valuation and residency dates are set.
At Fusion, our CPAs work with founders, early employees, and late-stage tech professionals to model ISO exercises, AMT exposure, and potential policy scenarios early so that your tax decisions are driven by strategy, not surprise. Contact us for help today!
1. Does a California wealth tax apply to my ISOs if I haven’t exercised yet?
Generally, current proposals focus on net worth and owned assets, not unexercised stock options. However, once you exercise ISOs and hold shares, those shares may be included in the taxable base under a valuation-based tax. Because proposals differ in how they define “assets” and “property interests,” this is an area where details matter.
2. If I move out of California, does that eliminate my exposure to a future wealth tax?
Not necessarily. California applies strict residency and sourcing rules, and some proposals tie liability to residency on a specific determination date rather than where you live later. In addition, equity earned while working in California can remain partially taxable to the state even after you move. A move may reduce exposure, but only if it’s properly timed and well documented.
3. How does a wealth tax interact with AMT on my ISOs?
AMT is triggered by exercising ISOs, while a wealth tax would apply based on the value of shares you continue to hold. In some scenarios, both can apply in overlapping periods – AMT at exercise, a wealth tax while holding shares, and income or capital gains tax when you sell. That stacking effect is why multi-year modeling is critical before making exercise or relocation decisions.
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This blog does not provide legal, accounting, tax, or other professional advice. We base articles on current or proposed tax rules at the time of writing and do not update older posts for tax rule changes. We expressly disclaim all liability regarding actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive