Taxes on a Private Company Tender Offer Depend on Where the Shares Come From.

A software engineer at a private company gets the email everyone with illiquid equity waits for. The company is running a tender offer, up to 10,000 shares per vested holder at $14.00, and the window closes in 20 business days. Taxes on a private company tender offer are not one calculation. They turn on where the shares come from, and the same $140,000 of proceeds leaves him with $115,748 or with $73,794.

A tender offer prices every share at one number. The tax code does not. Shares you own are a capital asset, so the gain is the tender price minus what you paid, at long-term rates once you have held them more than a year under §1222(3). An unexercised option is not. Exercise a nonqualified option and §83(a) makes the spread between strike price and fair market value compensation, which runs it through payroll. Exercise an incentive stock option and sell in the same breath and the ISO treatment is gone: §422(a)(1) wants two years from grant and one year from exercise, and a sale inside either one is a disqualifying disposition that turns the spread into ordinary income under §421(b).

Three ways to fill one allocation, and $41,954 of cash between the best and the worst on identical proceeds. Nothing in the offer documents points that out.

An option spread is a supplemental wage, withheld at a flat 22% for 2026 under the optional rate in Publication 15 and at a mandatory 37% only past $1,000,000 of supplemental wages for the year. That rate is near the bottom of the schedule. An engineer already at $218,900 of taxable income pays 32% on the next dollar and 35% above $256,225, so the withholding on his $116,000 spread covers $25,520 of a $39,480 bill. He owes $13,960 nobody mentioned.

The ISO version runs backwards from what you would guess: lower tax, higher cash risk. A disqualifying disposition is excluded from Social Security and Medicare wages by §3121(a)(22), from FUTA by §3306(b)(19), and the last sentence of §421(b) relieves the employer of income tax withholding. Publication 5992 states all three. The income lands in Box 1 of your W-2 next January with nothing withheld against it. Saving $2,726 of Medicare tax and then owing $39,480 in April with nothing set aside is not a win.

Sale proceeds carry no withholding either, so the closing date matters. A tender that funds in December lands in the fourth quarter, and the installment for it is due January 15, 2027. The cheap protection is the prior-year safe harbor in §6654(d)(1)(C): pay in 110% of your 2025 tax across the four installments and the size of the windfall stops mattering. Miss it and you are annualizing income on Schedule AI of Form 2210 to prove the money arrived in the fourth quarter, which works and is tedious.

Find out from the offer documents whether the buyer is the company or somebody else. Large employee tenders run both ways: the company repurchases the stock itself, or an outside investor buys it and the company administers the window. Nothing on the price-per-share page says which, and the §1202 redemption rules reach only purchases by the issuing corporation.

Qualified small business stock is the largest number in private company equity: stock acquired after July 4, 2025 and held five years excludes the greater of $15,000,000 or ten times basis, which is the arithmetic in Section 1202 after OBBBA. What almost nobody writes is that the company's own buyback can take all of it away.

Treas. Reg. §1.1202-2(b) says stock is not qualified small business stock if, during the 2-year period beginning one year before that stock was issued, the corporation buys more than a de minimis amount of its own stock and the purchased stock's value exceeds 5% of the value of all the corporation's stock measured at the start of that period. More than de minimis means over $10,000 paid and more than 2% of all outstanding stock. Paragraph (a) is narrower and reaches further back: a purchase above that floor from you, or from someone related to you under §267(b) or §707(b), anywhere in the 4-year period beginning two years before issuance, and your stock is out.

Put that against the move everybody makes in a tender window: exercise 10,000 options, sell half for cash, hold half for five years and the exclusion. The half you kept was issued inside both windows, and the company just bought shares from you. Clear the de minimis floor and paragraph (a) takes QSBS off the shares you kept. Clear 5% of the company's value and paragraph (b) reaches every share issued in that two-year window, including grants to people who sold nothing. A third-party buyer trips neither one. A tender buying 1% or 2% of a company never reaches the 5% test, so this is arithmetic rather than alarm, but whether a special purpose vehicle the company organized counts as an indirect purchase is unsettled enough to ask in writing before you exercise.

Sell the oldest shares you already own first, as far as the allocation goes. At 18.8% all in against 35% plus Medicare on a fresh spread, nothing else here is worth as much. If those shares came from an ISO you paid alternative minimum tax on years ago, selling now also puts the higher AMT basis to work and can free part of the minimum tax credit you have been carrying.

If you have to exercise, know which option you are exercising. An ISO exercised and sold in the same calendar year beats the nonqualified version by the $2,726 of Medicare tax and carries no AMT adjustment, because the disqualifying disposition lands in the year of the exercise. It also arrives with nothing withheld, so move the tax out of the proceeds the day they settle. And if the tender price sits above the company's most recent 409A valuation, read the documents for how the premium is being treated: some companies report the excess as compensation, which changes the basis your broker reports and lands you in taxes when you exercise stock options.

What I would not do is exercise and hold during a company-run tender because somebody said to start the QSBS clock. The clock may not start. Find out who is buying first.