Virginia Taxes on RSUs and Stock Options: A Tech Employee's Guide

Northern Virginia is one of the largest concentrations of tech employment on the East Coast. Amazon's HQ2 in Arlington has added tens of thousands of employees with significant RSU compensation. Microsoft has a major presence in the DC corridor. Leidos, Booz Allen Hamilton, SAIC, and CACI employ thousands of engineers with equity programs. Salesforce, Google, and a large cluster of defense-technology startups round out a NoVA tech ecosystem that stretches from Arlington to Reston to Tysons to Dulles.

For tech employees working there, Virginia's tax structure has several important characteristics. The headline: Virginia taxes all income — RSU vests, salary, capital gains, bonuses — at rates up to 5.75%. There is no preferential rate for long-term capital gains. But Virginia also has no state alternative minimum tax for ISO exercises — a real advantage compared to California (7% state AMT) and Colorado (3.47% state AMT). There is no state estate tax and no local income tax layered on top of state rates.

This guide covers how Virginia taxes each type of equity compensation, what nonresident sourcing means for engineers who moved here from California, and what a pending 2026 legislative proposal could mean for high earners on investment income.

Virginia's tax structure for tech employees at a glance

RSUs in Virginia

At vest: ordinary income taxed at 5.75%

When RSUs vest, the fair market value of the shares at the vesting date is ordinary income — taxed federally at your marginal rate (22–37% depending on total comp) and by Virginia at 5.75%. Your employer withholds at the IRS 22% supplemental rate federally, and Virginia requires 5.75% state withholding on supplemental wages. For senior engineers whose marginal federal rate is 32% or 37%, the 22% federal withholding creates a significant tax shortfall that must be addressed at filing — either through estimated quarterly tax payments or a W-4 adjustment. The RSU after-tax calculator models the exact federal and state withholding gap for your income level.

Example: an Amazon HQ2 principal engineer in Arlington vests $220,000 of RSUs in 2026. Federal income tax at 35% marginal rate = $77,000. Virginia state tax at 5.75% = $12,650. Additional Medicare Tax (0.9%) = $1,980. Total tax bite on that vest: approximately $91,630. After-tax RSU proceeds (before any holding-period appreciation): approximately $128,370.

After vest: capital gains taxed at 5.75%

Your cost basis in vested RSU shares is the FMV at vest. If you hold those shares and later sell at a higher price, the gain is a capital gain. At the federal level, long-term capital gains (shares held 12+ months from vest) qualify for preferential 0/15/20% rates. Virginia does not conform to this preference — all capital gains, short-term and long-term alike, are taxed at the same ordinary income rates (effectively 5.75% for tech employees).

The practical implication: there is no Virginia state tax incentive to hold RSU shares for more than 12 months. The federal incentive remains real — the difference between a 37% federal ordinary income rate and a 20% federal long-term capital gains rate on $200K of appreciation is $34,000 — but that saving comes entirely from the federal side. Virginia's arithmetic is neutral on the hold-versus-sell decision post-vest.

ISOs and Virginia's AMT advantage

Virginia's most significant advantage for startup employees with incentive stock options is the absence of a state-level alternative minimum tax. ISO exercises do not trigger any Virginia AMT liability — the ISO bargain element does not create a Virginia-specific tax event separate from the regular income tax structure.

The state AMT comparison

Concretely: a startup engineer in Reston exercises ISOs with a $500,000 bargain element in 2026. Federal AMT on that spread — after the $90,100 single-filer exemption and 26%/28% brackets — is approximately $129,000. California would add another $35,000 (7% state AMT). Virginia adds nothing: the ISO exercise creates no separate Virginia AMT event. The regular Virginia income tax applies only when and if the employee later sells the shares in a disqualifying disposition.

Qualifying vs. disqualifying dispositions in Virginia

• Qualifying disposition (hold ≥2 years from grant AND ≥1 year from exercise): the bargain element is a federal AMT preference item — no Virginia AMT equivalent. When sold, the gain is a long-term capital gain federally (0/15/20%) but taxed at 5.75% by Virginia (no LTCG preference). Virginia recognizes the gain at sale, not at exercise.
• Disqualifying disposition (sell before meeting both holding periods): the spread at exercise becomes ordinary income federally and is taxed by Virginia at 5.75% in the year of sale. No separate Virginia AMT event. Any remaining appreciation above the spread is a short-term capital gain — also 5.75% in Virginia.

The ISO AMT calculator models federal AMT exposure and lets you evaluate how state AMT layers (or doesn't layer) on your specific exercise scenario.

NSOs in Virginia

Non-qualified stock options are taxed at exercise: the spread (FMV at exercise minus strike price) is ordinary income, taxed by Virginia at 5.75%. There is no AMT event for NSOs at either the federal or Virginia state level. Post-exercise appreciation held for 12+ months is a long-term capital gain at the federal level — but taxed at 5.75% by Virginia (same as short-term). The decision whether to hold NSO shares after exercise should be driven by concentration risk and federal tax considerations, not Virginia-specific factors.

ESPP in Virginia

§423 Employee Stock Purchase Plans follow the same federal income-recognition structure, with Virginia taxing all income components at 5.75%:

• Disqualifying disposition: the ordinary income component (the discount, including any look-back benefit) is Virginia income at 5.75%; short-term gain above the spread is also 5.75%.
• Qualifying disposition: the smaller of (a) the discount at grant or (b) the gain over the original offering-period starting price is ordinary income at 5.75% in Virginia; any remaining appreciation above that is a long-term capital gain — also 5.75% in Virginia.

Since Virginia gives no LTCG preference, the qualifying vs. disqualifying distinction is driven almost entirely by federal tax considerations. See the ESPP guide and ESPP calculator for after-tax modeling.

Moving from California to Virginia: what changes for equity

The California-to-Virginia move is a common path for tech workers attracted by lower housing costs in NoVA suburbs, no state estate tax, and lower equity tax rates (5.75% vs. up to 13.3%). The savings can be substantial — but California's long-arm sourcing rules don't stop at your old state line.

California long-arm sourcing still applies to old grants

California taxes RSU income based on the proportion of the grant-to-vest period spent working in California — regardless of where you live when the shares vest. If you spent 2 of 4 years in California on a particular grant before moving to Virginia, California claims 50% of each vest event on that grant as California-source income. Virginia simultaneously claims the portion attributable to time worked in Virginia. This can create partial double-state-tax exposure on the same income — partially offset by credits — until all grants issued before your move have finished vesting.

Virginia uses the same grant-to-vest apportionment approach for nonresidents: if you perform services in Virginia during part of an RSU's vesting period and then leave, Virginia retains taxing authority over the Virginia-apportioned portion of future vests on that grant.⁶

The California equity tax guide and the remote work state tax guide cover the sourcing mechanics and credit interaction in detail.

Annual income tax savings after the move

For a senior engineer with $400K in RSU vests and meaningful equity, moving from California to Virginia can reduce state income tax by $30,000–$60,000 per year. Unlike Washington, Texas, or Florida — which have no state income tax — Virginia still takes 5.75% of ordinary income. But the savings versus California are substantial, and the absence of Virginia state AMT is particularly valuable for startup employees who hold pre-IPO ISOs.

AWS HQ2 employees: specific considerations

Amazon's HQ2 in Arlington represents a concentration of RSU-heavy comp packages that makes Virginia equity tax planning especially relevant. A few Amazon-specific points:

• Vesting schedule: Amazon uses a back-weighted RSU vesting schedule (5%/15%/40%/40% over 4 years), which concentrates large vest events in years 3 and 4. Virginia income tax on a 40% vest tranche at a $25K base unit price and large grant size can easily exceed $30,000 in a single year.
• Amazon RSU grants grow with tenure: refresher grants at higher levels (L6/L7/senior principal) can push vest income well above $300K/year by mid-career — squarely in the range where tax planning matters significantly.
• Relocation packages: many Amazon HQ2 hires relocated from Seattle (no state income tax) to Virginia. The move means RSUs from Seattle-era grants that were previously tax-free at the state level are now subject to Virginia's 5.75% — but only on the Virginia-apportioned portion of grants still vesting after the move.

Proposed 2026 legislation: HB 378 net investment income tax

Virginia House Bill 378, introduced in the 2026 General Assembly session, would impose a new 3.8% tax on net investment income for taxpayers with federal modified adjusted gross income above $500,000 (single) or a proportional threshold for joint filers. The tax would apply to dividends, interest, capital gains (including RSU/ESPP/option gains), rental income, and other passive income — effective for tax year 2027.⁷

If enacted, this would raise Virginia's effective top rate on capital gains from 5.75% to 9.55% for high earners — a meaningful increase, and approaching New York levels for investors above the $500K MAGI threshold. The bill had not become law as of the publication of this guide. However, tech employees making multi-year equity planning decisions — particularly startup founders contemplating liquidity events and senior engineers with large RSU pipelines — should be aware the proposal exists and monitor the 2026 session outcome.

Planning strategies for Virginia tech employees

1. No state AMT — exercise ISOs without the California penalty

If you're a startup employee or pre-IPO engineer with ISOs, Virginia's absence of a state AMT meaningfully expands your exercise window. The federal AMT exposure on ISO bargain elements is real (26–28% federal rate on the spread), and the ISO AMT calculator can help you find the optimal exercise amount each year. But you don't need to reserve additional state AMT budget the way California employees do. A $400,000 ISO exercise that would cost a California employee ~$28,000 in state AMT costs a Virginia employee $0 at the state level.

2. No Virginia incentive to over-hold RSU shares

The federal incentive to hold RSU shares 12+ months is real (converting ordinary income rates to 0/15/20% LTCG rates on the post-vest appreciation). Virginia gives you no additional incentive — both short-term and long-term gains face 5.75%. Don't hold concentrated employer stock beyond the point where federal LTCG savings justify the concentration risk. See the concentrated stock risk guide for diversification strategies.

3. Max retirement accounts to reduce Virginia taxable income

Traditional 401(k) contributions, HSA contributions, and Mega Backdoor Roth after-tax contributions all affect Virginia taxable income differently. Traditional 401(k) deferrals reduce Virginia taxable income dollar-for-dollar at 5.75%. Mega Backdoor Roth contributions are made with after-tax dollars — no Virginia deduction now, but tax-free withdrawals later. For tech employees expecting to stay in Virginia long-term, the Mega Backdoor Roth calculator and the tech employee retirement planning guide cover the account-stacking decision.

4. DAF for appreciated employer stock

Donating RSU shares (held 12+ months from vest) directly to a donor-advised fund eliminates the federal capital gains event and the Virginia 5.75% capital gains tax. You receive a federal charitable deduction at full fair market value. For Virginia tech employees with concentrated employer stock and meaningful charitable intent, this is the most tax-efficient way to reduce position size without paying capital gains. The DAF strategy guide covers implementation mechanics for RSU and ESPP shares.

5. Track CA long-arm exposure on pre-move grants

If you relocated from California to Virginia (or from Seattle to Arlington for Amazon HQ2), your pre-move RSU grants may still carry California-source income for the California-apportioned portion of remaining vest tranches. Calculating the grant-to-vest day count for each active grant — and properly crediting California taxes paid against Virginia liability — requires multi-state sourcing analysis. A tax advisor who handles equity compensation is the right resource for this; the interaction of CA long-arm sourcing with Virginia's credit mechanism is not straightforward on TurboTax alone.

What a fee-only advisor can help you model

• Year-by-year ISO exercise strategy leveraging Virginia's zero-state-AMT environment
• Whether California long-arm sourcing still applies to your specific grants after a California-to-Virginia or Seattle-to-Arlington move, and by what percentage
• RSU lot selection and tax-loss harvesting in a 5.75% state-tax environment
• Whether HB 378 — if enacted — changes your equity planning priorities for 2027
• Retirement account stacking (401k + Mega Backdoor Roth + HSA) to reduce Virginia ordinary income in peak earning years
• Concentrated stock risk reduction via systematic selling, 10b5-1 plans, or DAF donations of appreciated employer shares