Moving Out of California With Unvested Equity: How States Divide the Tax

Leaving the state does not leave your California tax history behind. Equity earned while you worked here may remain partly taxable here for years after the move.

Remote work and the cost of Bay Area housing have prompted many technology employees to relocate to states with lower or no income tax. A common assumption is that once you move, future RSU vesting and option exercises are taxed only by the new state. California's rules are more complicated than that. The Franchise Tax Board treats equity compensation as earned over the period you worked for it, and it taxes the share of that period you spent working in California, wherever you live when the income is finally recognized.

The allocation formula

The FTB's guidance on equity compensation, Publication 1004, sets out the method. For a nonresident who worked both inside and outside California, the taxable portion is determined by a ratio: California workdays from the grant date to the exercise date, divided by total workdays from grant to exercise. The same allocation approach applies to nonstatutory options, to the AMT adjustment on incentive stock options, to restricted stock from purchase to vesting, and to the ordinary income portion of employee stock purchase plans.

Consider a hypothetical engineer who received an RSU grant in January 2025 while working in San Jose, moved to Austin in January 2027, and has a tranche vest in January 2029. Two of the four years between grant and vest were California workdays, so roughly half of that tranche's value would be California-source income taxable here, even though the engineer had been a Texas resident for two years. The remaining half would be taxable, if at all, by the new state.

Capital gains are different

Once shares are delivered or options are exercised, subsequent appreciation is capital gain, and capital gain is generally sourced to the state of residence at the time of sale. Publication 1004 confirms this for ESPP shares, and the same principle applies to stock acquired through other awards. That creates a potential planning distinction: the compensation element is allocated by workdays, while later capital gain follows residency. Because California taxes capital gains as ordinary income at rates up to 13.3%, a resident of a no-tax state who sells appreciated shares after a genuine move may face a very different bill than a resident who sells in California. The difference only holds if the move is real in the FTB's eyes.

Residency is the harder question

The allocation rules assume you have actually become a nonresident. The FTB's residency guidelines, Publication 1031, explain that residency turns on where you have the closest connections, and that domicile means the place you intend to be your true, fixed, permanent home. The factors listed include time spent in and out of California, the location of your spouse and children, your principal residence, driver's license, vehicle and voter registration, and social and professional ties. The publication emphasizes that it is the strength of ties, not merely their number, that controls.

An employee who moves to Nevada but keeps a Palo Alto home, a spouse who remains in the Bay Area, and a habit of flying back for most of the week is at real risk of being treated as a continuing California resident, in which case all of the equity income remains taxable here. Large vesting or exercise events in the years after a move tend to attract attention because the dollars involved are significant.

Withholding and reporting

Employers apply the same allocation when withholding. California requires withholding on equity compensation at a 10.23% supplemental rate, and a payroll system may continue to withhold California tax on the allocated portion long after your move. You will generally need to file a California nonresident return, Form 540NR, for each year in which allocated income is recognized, and the new state may allow a credit for tax paid to California, depending on its rules. Keeping a contemporaneous log of workdays by location, starting well before the move, is the practical foundation for any of this.

Planning considerations

The workday formula rewards a longer period as a nonresident before vesting or exercise, and it penalizes exercising options or receiving large vests in the months around a move. Some people accelerate exercises before leaving to lock in a known result; others defer and accept partial California taxation. Each approach carries risk, including the possibility that the stock moves against you while you are optimizing for state tax.

This article is educational only and is not investment, tax, or legal advice. State residency and sourcing rules are fact-specific, and readers should consult a qualified tax professional before relocating.

Important Disclosures

Important Disclosures: Propulsion Capital Management is an investment adviser registered with the State of California Department of Financial Protection and Innovation. Registration does not imply a certain level of skill or training. This article is provided for general informational and educational purposes only and does not constitute investment, tax, legal, or accounting advice, nor an offer or solicitation to buy or sell any security or to adopt any particular investment strategy. The information is believed to be accurate as of the date of publication but is subject to change without notice; tax laws and regulations change frequently and their application depends on individual facts and circumstances. Nothing herein should be relied upon as a substitute for personalized advice from a qualified professional. Investing involves risk, including the possible loss of principal, and past performance is no guarantee of future results. Diversification does not ensure a profit or protect against loss. Any examples are hypothetical, are for illustrative purposes only, and do not reflect the experience of any client. Links to third-party websites are provided for convenience; Propulsion Capital Management does not endorse, and is not responsible for, the content of third-party sites. Propulsion Capital Management does not provide tax or legal advice; please consult your tax adviser or attorney regarding your specific situation.