You've taken a job with a company in Seattle. Your start date is January 15. You move to Washington, set up your new apartment, and begin working from the new office. When your RSUs from your prior California employer vest in March, you assume Washington's lack of income tax applies. You're a Washington resident now.
California disagrees. And California is going to win that argument.
Equity compensation follows special sourcing rules that trip up even sophisticated taxpayers. Where you live when the income is recognized is only part of the equation. California also looks at where you worked during the period you were earning that equity. The result is that moving out of California doesn't immediately free your equity compensation from California tax.
How California Sources Equity Compensation
California sources equity compensation income based on where you performed services during the relevant earning period. For RSUs and most stock options, that period runs from grant to vest (for RSUs) or grant to exercise (for options). The state applies an allocation formula: California-source income equals total income multiplied by the ratio of California workdays to total workdays during the earning period.
The allocation formula: California source equity income = Total equity income × (California workdays during earning period ÷ Total workdays during earning period)
If you received an RSU grant while working in California and worked there for three of the four years before the shares vested, approximately 75% of that income is California-source—regardless of where you live when the vest occurs.
This means that an RSU vesting after you've moved to Texas, Washington, or any other state still generates California-source income to the extent you worked in California during the vesting period. Moving doesn't eliminate the California tax—it just starts the clock on future grants.
RSUs: The Most Common Scenario
Restricted Stock Units are the standard equity compensation vehicle at most large tech companies. The typical structure is a four-year vesting schedule, often with a one-year cliff and monthly or quarterly vesting thereafter.
When RSUs vest, the fair market value of the shares on the vesting date is ordinary income. For California sourcing purposes, the relevant period is the grant date to the vest date. Every day you worked in California during that window counts toward California's allocation.
Example: The Common Case
You receive an RSU grant on January 1, 2022, while working for a California-based company in San Francisco. The grant has a four-year vest with 25% vesting each January 1. You move to Nevada on July 1, 2024.
On January 1, 2025, another 25% of your grant vests. You've been a Nevada resident for 18 months. But the earning period for this tranche runs from January 1, 2022 (grant) to January 1, 2025 (vest)—three full years. You worked in California for two and a half of those years. Roughly 83% of this vest is California-source income.
On January 1, 2026, the final tranche vests. Now the earning period is four years, and you worked in California for only two and a half of them. The California-source percentage drops to about 63%. Better, but still a majority.
Only grants issued after your move will be fully free of California sourcing from the start.
Stock Options: Similar but Different
Stock options follow the same general approach, but the earning period runs from grant to exercise rather than grant to vest. This creates a planning opportunity: you control when you exercise.
Nonqualified Stock Options (NQSOs)
For NQSOs, the spread between the exercise price and fair market value at exercise is ordinary income. The California allocation uses the same formula, but the period runs from grant to exercise. If you hold options for years after leaving California before exercising, the California-source percentage decreases with each passing year.
Incentive Stock Options (ISOs)
ISOs are more complex. There's no regular income tax at exercise if you hold the shares (though there may be AMT consequences). If you meet the holding requirements, the eventual gain is taxed as a capital gain. California generally sources capital gains to your state of residence at the time of sale. This makes ISOs potentially more favorable for departing California employees, but the AMT implications require careful analysis.
The 83(b) Election: Enhanced Value for Future California Departures
If you receive actual restricted stock (not RSUs—83(b) elections don't apply to RSUs), you have 30 days from the grant date to make an 83(b) election. This election accelerates income recognition to the grant date rather than waiting for vesting. For employees thinking about eventually leaving California, this election has benefits beyond the standard tax analysis.
The conventional 83(b) wisdom focuses on converting ordinary income to capital gains. You pay ordinary income tax on the grant date value (typically low for early-stage equity), and all future appreciation becomes capital gain eligible for lower federal rates. That analysis applies regardless of where you live.
But for California residents, there's an additional dimension. Without an 83(b) election, when the stock vests, the entire fair market value is ordinary income—and California applies its allocation formula. If you worked half the vesting period in California, California taxes half of all the appreciation at ordinary rates up to 13.3%. The stock could go from $10,000 at grant to $10 million at vest, and California would claim its share of that entire gain as ordinary income.
With an 83(b) election, you recognize ordinary income at grant—$10,000, fully taxed by California since you were a resident at grant. The subsequent $9.99 million in appreciation is capital gain, sourced to your state of residence when you sell. Move to Texas or Nevada before selling, and California has no claim on the upside.
The California departure angle: For early-stage startup employees who think there's any chance they might leave California before a liquidity event, the 83(b) election isn't just about federal capital gains treatment. It's about ensuring California can only tax the grant value—not its allocated share of potentially life-changing appreciation. This consideration can significantly tilt the analysis toward making the election.
The trade-off remains forfeiture risk. If you leave the company before vesting and forfeit the shares, you've paid tax on income you never actually received—and you can't get that tax back. The 83(b) analysis always requires weighing the tax benefits against the risk of forfeiture. But for employees who are confident they'll stay through vesting and are even considering a future move out of California, the enhanced benefit of escaping California's reach on appreciation makes the election more attractive.
Practical Implications for Departing Employees
If you're planning to leave California and have unvested equity, understand that your departure doesn't immediately eliminate California's claim on that compensation. Here's what to consider:
Future grants are clean. RSU grants or option grants issued after you establish residency elsewhere and are working outside California have no California-source component (assuming you're not working in California).
Existing unvested equity carries California baggage. The longer you worked in California during the earning period, the higher the California-source percentage. This exposure diminishes over time but doesn't disappear until those tranches fully vest.
Options give you some control. If you have vested but unexercised stock options, delaying exercise increases the denominator in the allocation formula. Each year you wait while working outside California reduces the California-source percentage. This needs to be weighed against stock price risk, tax bracket considerations, and option expiration dates.
Double taxation is unlikely but paperwork is real. If you move to another income-tax state, you'll generally get a credit for taxes paid to California on the same income. If you move to a no-tax state, the California tax is simply a cost you'll continue to bear on legacy equity for years after your departure.
Remote work complicates the picture. If you continue working for a California company after moving, you may still be accruing California-source workdays. Days spent working in California—whether at the office or on a business trip—count toward the allocation. Fully remote workers outside California can avoid this, but anyone with a hybrid arrangement or regular travel to California headquarters should track their work location carefully.
What You Can Do
Timing your departure around equity events can make a significant difference. Understanding which tranches are vesting when, what their earning periods look like, and how the allocation formula will apply lets you model the California tax cost of different move dates.
Most importantly, don't assume that moving to a no-tax state immediately saves you California tax on equity compensation. It doesn't. Your equity granted and largely earned in California will remain partially California-source for years. Building this into your planning—and your expectations—is essential.