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New York lawmakers increased income tax rates on the state’s highest earners in 2021, which continues to affect how New Yorkers may be taxed when they exercise stock options in later years, including 2025, especially when combined with the 2025 federal brackets and AMT rules described by the IRS (https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2025).
TL;DR
When New York lawmakers passed the state’s $212 billion budget in April 2021, the public latched onto the most eye-popping statistic: that ultra-wealthy earners living in New York City would pay the country’s highest combined state income tax rate of 14.776%, beating out California, which taxes its millionaires 13.3%.
And while most of us won’t have to worry about falling into that 14.776% state income tax bracket (earning more than $25 million in income in a single calendar year and living in New York City), the state did make changes to its income tax laws that could potentially affect New Yorkers who decide to exercise or sell their stock options this year.
People living in New York City and Yonkers pay an additional local income tax on top of New York State rates, with brackets that vary by income level and apply regardless of tax filing status [NEEDS VERIFICATION: last known values were 3.078%, 3.762%, 3.819% and 3.876%].
For context, New York state income tax brackets have shifted since 2021, and in 2025 the top marginal rate is 10.9% on higher incomes, with several middle-income brackets that affect many startup employees with equity income, according to the New York State Department of Taxation and Finance (https://www.tax.ny.gov/pit/file/tax-tables.htm):
One last wrinkle: The state is applying a slightly different withholding rate on wages paid between Jan. 1, 2021 and July 1, 2021.
If you live or work in New York and you are thinking about exercising or selling incentive stock options (ISOs), the state’s income tax rules and the 2025 federal brackets could significantly affect how much you owe at tax time. In 2025, ISO exercises can create alternative minimum tax (AMT) exposure at the federal level, and New York can tax your income and capital gains at rates that reach up to 10.9% according to the New York State Department of Taxation and Finance (https://www.tax.ny.gov). Here are three common situations you might find yourself in if you hold ISOs:
I want to exercise some ISOs in 2025:
It’s possible that buying ISOs triggers the federal alternative minimum tax, or AMT. Check with your financial advisor, or check out our Stock Option Tax Calculator.
I want to sell some ISOs that I’ve held for less than 1 year:
If you decide to sell ISOs that you have held for less than 1 year, you will owe New York state income tax on top of federal income tax. For a disqualifying ISO sale in 2025, any gain is treated as ordinary income for federal purposes, and New York also taxes that income at ordinary rates, with the top state rate reaching 10.9 percent according to the New York State Department of Taxation and Finance (https://www.tax.ny.gov). At the federal level in 2025, ordinary income and short-term capital gains are taxed at rates up to 37 percent for high earners, according to the IRS (https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2025). How much you owe in income taxes will depend on your total income, your filing status, and the size of your gains, if any.
For example, let’s say you exercise 10,000 ISOs in January 2025 at a strike price of $1 per share, buying those shares for a total of $10,000. In October 2025, you sell those 10,000 shares to someone else for $5 per share, for a total of $50,000.
You’ve earned a gain of $40,000, which is treated as ordinary income on your 2025 federal and New York state tax returns, on top of your wages and any other short-term investment income. Depending on your total income from this short-term ISO sale, you could move into a higher 2025 tax bracket, with federal ordinary income rates reaching up to 37% and New York state rates up to 10.9%, according to the IRS (https://www.irs.gov) and the Tax Foundation (https://taxfoundation.org).
I want to sell incentive stock options (ISOs) that I’ve held for more than 1 year:
If you decide to sell ISOs that you have held for more than 1 year, the sale can qualify for long-term capital gains treatment on your 2025 federal tax return, with rates of 0%, 15%, or 20% depending on your income according to the IRS (https://www.irs.gov/taxtopics/tc409). New York does not offer a lower long-term capital gains rate, so for 2025 the state generally taxes all gains from stock sales as ordinary income at rates that can reach 10.9%, no matter how long you hold the stock, according to the New York State Department of Taxation and Finance (https://www.tax.ny.gov/pit/file/tax_tables.htm).
Depending on your overall financial situation, it may make sense to hold your ISOs for more than one year after exercise so that any gain qualifies for long-term capital gains treatment on your 2025 federal income tax return, which is taxed at 0%, 15%, or 20% depending on your income according to the IRS (https://www.irs.gov/taxtopics/tc409).
Non-qualified stock options (NSOs) are taxed differently from ISOs by the IRS and New York state. Your employer might only offer you NSOs, or you might find that your ISOs have automatically turned into NSOs if you (a) leave your company and fail to exercise your ISOs within 90 days and (b) work for a company that allows a more-than-90-day exercise window.
If you exercise or sell your NSOs in 2021, you may find that you owe income taxes to both the IRS and New York state. Here are three common situations you might find yourself in if you hold NSOs:
I want to buy NSOs in 2025:
One of the major differences between ISOs and NSOs is that with NSOs you often face two separate tax events: in 2025, the spread between the fair market value and your exercise price is taxed as ordinary income when you exercise, and any additional gain or loss is taxed again as capital gains when you eventually sell the shares, according to the IRS (https://www.irs.gov/taxtopics/tc427).
For example, let’s say you want to exercise 10,000 NSOs from your employer for $1 per share, for a total cost of $10,000. If the fair market value of those NSOs is $5 per share, based on a private company’s 409A valuation or the stock price for a public company, you would have a $4 spread per share that is treated as ordinary income for tax purposes in 2025 according to the IRS (https://www.irs.gov/taxtopics/tc427).
As soon as you exercise those NSOs, you will owe income taxes on the assumed gain, in this case, $40,000. If you live in New York, that $40,000 spread is treated as ordinary income for both federal purposes in 2025, where top ordinary rates can reach 37% according to the IRS (https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2025), and for New York state income tax, which can reach 10.9% on higher incomes according to the New York State Department of Taxation and Finance (https://www.tax.ny.gov/pit/file/tax-tables.htm).
I want to sell NSOs that I’ve held for less than 1 year:
Once you exercise your NSOs, you own your company’s stock and you decide when to sell the shares. Some people choose to exercise and sell on the same day, using the sale proceeds to cover the exercise cost and taxes, which can make the one-day transaction feel similar to receiving a cash bonus for that tax year.
In that case, you will owe ordinary income tax on the gain at both the federal level and in New York. For 2025, that means the gain is taxed at your federal ordinary income rate, which can be as high as 37% for top earners according to the IRS (https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2025), plus New York State income tax, which can reach 10.9% on the same income according to the New York State Department of Taxation and Finance (https://www.tax.ny.gov/pit/file/tax-tables.htm).
Other people exercise their NSOs and decide to hold onto the shares for a while to see if they appreciate in value before selling. In that case, you will owe tax again when you eventually sell, typically at 2025 federal long-term or short-term capital gains rates depending on your holding period and income level, according to the IRS (https://www.irs.gov/taxtopics/tc409).
For example, imagine you exercise NSOs and hold the shares for more than a year before selling. In that case, the spread at exercise is taxed as ordinary income in the year you exercise, and any additional gain when you sell is taxed as long-term capital gains for 2025 based on your income bracket, according to the IRS (https://www.irs.gov/taxtopics/tc409).
If you sell NSOs less than 1 year after you exercise them, or less than 2 years after they were granted, the IRS and New York State will treat any gains you earn on the transaction as ordinary income for the 2025 tax year, which is taxed at the same rates as short-term capital gains according to the IRS (https://www.irs.gov/taxtopics/tc409).
I want to sell NSOs that I’ve held for more than 1 year:
If you exercise NSOs and hold the shares for more than 1 year before selling, any gain on that later sale is generally taxed as long-term capital gains at the federal level for the 2025 tax year, according to the IRS (https://www.irs.gov/taxtopics/tc409). New York State does not offer a lower rate for long-term capital gains, so stock sale profits are taxed as ordinary income for state purposes regardless of how long you hold the shares, as outlined by the New York State Department of Taxation and Finance (https://www.tax.ny.gov/pit/file/tax_tables.htm).
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One thing we occasionally hear from New York startup employees is, “I’m on the edge of the next 2025 tax bracket, and I’m worried I’ll take home less if I get a raise at work or sell some stock that counts as income.”
Do not worry. In the United States, the federal income tax system is progressive, which means each slice of your income is taxed at its own bracketed rate rather than all of it being taxed at the highest rate you reach.
For example, let’s say you are a single person living and working in New York City who earns a $200,000 annual salary in 2025. At that income level, your wages and any ordinary income from NSO exercises or RSU vesting would be taxed at federal ordinary income rates that can reach up to 37% for higher earners in 2025, according to the IRS (https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2025), plus New York State income tax that can reach a top rate of 10.9% on higher incomes, according to the New York State Department of Taxation and Finance (https://www.tax.ny.gov/pit/file/tax-tables.htm), and New York City income tax on top of that [NEEDS VERIFICATION: last known NYC top rate was 3.876%].
You decide to sell ISOs for a long-term capital gain of $1 million, which increases your total income for 2025 to $1.2 million. At that level, you are likely in the top 2025 federal ordinary income bracket of 37% (according to the IRS, based on Rev. Proc. 2024-40: https://www.irs.gov/pub/irs-drop/rp-24-40.pdf), and you may face New York State income tax rates up to 10.9% on that income (according to the Tax Foundation: https://taxfoundation.org/data/all/state/new-york-state-taxes/). [NEEDS VERIFICATION: last known New York City top rate was 3.876%]
Looking at those two numbers, you might think you’ll owe $162,000 in New York state income taxes. But no. Under New York’s progressive tax system for 2025, your effective state tax bill will be lower than that headline number:
Add that all up, and in this example you would owe a [NEEDS VERIFICATION: last known value was $130,494.12] in combined New York State and New York City taxes on $1.2 million of income, based on the applicable 2025 state and local tax rules (see New York State Department of Taxation and Finance at https://www.tax.ny.gov and NYC Department of Finance at https://www.nyc.gov/site/finance).
Want to understand when and how to exercise your stock options, and what that might mean for your 2025 taxes? Connect with the Secfi team to talk through your equity and tax scenarios, or explore our Stock Option Exit Calculator to estimate potential taxes and after‑tax proceeds before you make a move.