How Tender Offers Are Taxed: A Guide for Employees and Investors

Tender offer tax treatment follows the equity you hand over. The tender price is the same for every seller. What changes is how much of it counts as wages and how much as a capital gain. The table compares five common cases on what you sell, what is taxed as wages and what is taxed as a gain.

Restricted stock units (RSUs), a promise of shares delivered later, are a separate case. A unit becomes a share only when it settles, and settlement is taxed as wages. Once it has settled, it falls in the first row. The RSU taxes guide covers settlement.

When you sell shares you already own, tender offer proceeds are taxed like any other sale of stock. Your gain is the price you receive minus your basis. Basis is what you paid for the shares plus any amount already taxed as income when you got them. For option shares, that is the exercise price plus the spread you were taxed on at exercise. For settled RSUs, it is the value that went on your W-2. The cost basis guide covers every case.

The holding period sets the rate. If you held the shares more than one year, the gain is long term. It is taxed at 0%, 15% or 20%, depending on your taxable income. If you held them one year or less, the gain is short term and taxed like wages. A loss offsets other gains, and up to $3,000 a year of net loss can reduce your other income.

A long-term gain can also carry the net investment income tax, an extra 3.8% federal tax. It applies when your modified adjusted gross income passes $200,000 if you file single, or $250,000 if you file jointly.

When the Company Is the Buyer

Many tenders are run by the company itself, which buys back its own shares. Tax law calls that a redemption. Under Section 302 of the tax code, a redemption is taxed as a sale only if it passes one of several tests. One asks whether the buyback works like a dividend in substance. Another is met when your share of the voting stock falls by more than 20% and you end up with less than half of the votes. Selling all of your shares also passes.

A redemption that fails every test is taxed as a distribution, which can be a dividend. When an investor buys the shares, Section 302 does not apply, and the sale is simply a sale. The offer document names the buyer. Its tax section describes how the payment is expected to be treated, so read it before you elect.

When Part of the Price Counts as Pay

Part of a payment to employees can be treated as pay for their work. That can happen when employees get more for their shares than other sellers do, or more than the shares are worth. The company decides how it reports the payment. Ask before the window closes whether any part will appear on your Form W-2 as wages.

If your shares are qualified small business stock (QSBS), part or all of the gain may be free of federal tax. That depends on the company’s size when it issued the shares and on how long you held them. For stock acquired after July 4, 2025, the exclusion starts at 50% after three years and reaches 100% after five.

Many employees hold options and no shares. A stock option is the right to buy shares at a fixed price, called the exercise price. In a tender, you usually exercise and sell in one step. You buy the shares at the exercise price, and the buyer pays you the tender price. The exercise price and the tax withheld come out of the proceeds. How the tax works depends on the kind of option.

Nonqualified Stock Options

With a nonqualified stock option (NSO), the spread is wages. The spread is the tender price minus your exercise price. Your employer reports it on your Form W-2, in box 12 with code V, and adds it to your pay in box 1. It withholds federal income tax at 22%, the flat rate for supplemental wages, or 37% on supplemental wages above $1 million in the year.

Social Security tax of 6.2% applies until your wages for 2026 reach $184,500. Medicare tax of 1.45% has no cap. An extra 0.9% Additional Medicare Tax applies to wages above $200,000 if you file single. Your basis in the shares becomes the tender price, so the sale itself shows little or no gain.

Incentive Stock Options

An incentive stock option (ISO) keeps its tax benefit only if you hold the shares two years from the grant and one year from exercise. Selling in the same tender as you exercise breaks that rule. This is called a disqualifying disposition. The spread at exercise becomes ordinary income, and your employer reports it as wages in box 1 of your W-2. Any further gain is a capital gain. A sale at a loss gives a capital loss and no ordinary income.

No income tax, Social Security or Medicare tax is withheld on that ISO income. The IRS exempts stock from ISOs and employee stock purchase plans from payroll withholding when you sell it. So the whole federal tax on the ISO income is due with your return, or earlier through estimated payments.

ISO shares you exercised in an earlier year and have held long enough are different. If both holding periods are met, the whole gain over the exercise price is a long-term capital gain. The ISO vs NSO guide explains both option types, and the AMT guide covers the alternative minimum tax that an earlier ISO exercise can trigger.

ESPP Shares

Shares from an employee stock purchase plan (ESPP) follow their own rule. Suppose you held them two years from the offering date and one year from purchase. Then the ordinary income is the smaller of the discount on the offering date and your actual gain. If you sell sooner, the ordinary income is the full spread on the purchase date, even if that exceeds your gain. The rest is a capital gain or loss. See ESPP vs RSU for a worked example.

A private company offers $40 a share. An employee files single, earns a $150,000 salary and sells 3,000 shares in three lots of 1,000. Lot A comes from NSOs exercised three years ago at $4, when the shares were worth $10. The $6 spread was taxed back then. Lots B and C are options with a $4 exercise price, exercised in the tender. Lot B is an NSO, and lot C is an ISO.

The full federal income tax bill on the tender looks like this:

• Wages from lots B and C$72,000 of wages → $17,610 of income tax. Most of it falls in the 24% bracket, and the last $4,125 in the 32% bracket.
• Long-term gain from lot A$30,000 of gain → $4,500 at 15%, plus $1,140 of net investment income tax at 3.8%.
• Withheld vs owed$7,920 withheld → $23,250 due. About two-thirds of the bill, $15,330, is still owed when you file.

The gap sits mostly in lot C. Its ISO income is taxed at the same rates as lot B, but nothing is withheld, so the cash looks larger than it is. Lot B’s Social Security tax stops at the $184,500 wage base: only $34,500 of its spread is taxed at 6.2%.

• Treating withholding as the billThe 22% is a prepayment. If your top rate is 24% or 32%, the rest is due when you file.
• Spending the ISO cashNothing is withheld on ISO income sold in a tender. Set the tax aside or make an estimated payment.
• Using the broker’s basisA form can show only the exercise price as your basis. Add the income already taxed on your W-2, or you pay tax on it twice.
• Selling a month too earlyOne day past a year turns a short-term gain into a long-term one. Check the date you acquired each lot.
• Skipping the tax section of the offerIt says who the buyer is and how the payment is expected to be reported. That decides whether Section 302 applies.
• Forgetting the stateThis page covers federal tax only. If you moved while the equity vested, more than one state may claim part of it.

• The tender itselfHow the window, the cap and proration work: tender offer and employee tender offer.
• OptionsHow the two option types are taxed: ISO vs NSO and how to exercise stock options.
• Equity plans comparedPurchase plans and units side by side: ESPP vs RSU and ESOP vs ESPP.
• Startup stockWhen the gain can be tax free: QSBS and 83(b) election vs QSBS.

Tender offer

An offer to buy shares from many holders at one price during a set window. In a private company, the buyer is the company or an outside investor.

Basis

What you paid for shares plus any amount already taxed as income when you got them. Your gain is the sale price minus your basis.

Spread

The value of a share minus the exercise price of the option used to buy it.

Nonqualified stock option (NSO)

An option whose spread is taxed as wages when you exercise it, with tax withheld.

Incentive stock option (ISO)

An option that can turn the whole gain into a long-term capital gain if you hold the shares two years from grant and one year from exercise.

Disqualifying disposition

A sale of ISO or ESPP shares before the holding periods end. Part of the gain becomes ordinary income.

Supplemental wages

Pay outside regular salary, such as bonuses and option income. Federal income tax is withheld on it at a flat 22%.

Redemption

A company buying back its own shares. Section 302 decides whether it is taxed as a sale or as a distribution.

Long-term capital gain

Gain on an asset held more than one year, taxed at 0%, 15% or 20%.

Net investment income tax (NIIT)

An extra 3.8% federal tax on investment income above set income levels.

Figures were last checked on October 29, 2026. They are US federal rules for tax year 2026. The worked example is illustrative arithmetic on those rules and uses no market data. State tax is not covered.