Introduction
Non-residents often believe they’re off the hook for California taxes but stock options granted while living or working in California may still be sourced to the state even years later.
In 2025, with increasing audits on equity-based income, this blog explains when non-residents are liable for California taxes on exercised or vested stock options.
IRS and California Tax Code References
- IRC §83(a) – Taxation of property transferred in connection with services
- FTB Pub. 1004 – Taxation of nonresident stock options
- R&TC §17952 – CA-source income of nonresidents
- R&TC §17041 – CA PIT residency rule
When Does CA Claim Stock Option Income?
Even if you’ve moved out of California, you may owe tax if:
- The options were granted while you were a CA resident
- You performed work in CA during the vesting period
- The option is non-qualified (NQSO), not an ISO
Key Principle: California taxes income that’s sourced to the state, including compensation earned during prior residency.
Example: Former California Engineer in Texas
Example: Alex was granted 50,000 NQSOs in 2021 while working in San Francisco. He moved to Austin, TX in 2023. He exercised the options in 2025 after full vesting.
- CA looks at the vesting period (2021 -2024) and how much work was performed in CA
- 75% of that period was in CA → 75% of the gain is CA-source income
Even though Alex lives in Texas in 2025, he owes PIT to California on that portion.
Step-by-Step: Handling CA Stock Option Income as a Non-Resident
- Track Grant, Vest, and Exercise Dates
Document exactly when and where services were performed. - Calculate CA Sourced Portion
Use time-based allocation if options vested over multiple years. - File Form 540NR (Nonresident Return)
Report the CA portion of stock income even if you live elsewhere. - Retain Payroll and Offer Letters
This helps prove work periods and residency status during audits. - Plan Exit Strategy Early
Pre-exit or pre-move planning can reduce sourcing exposure.
Conclusion
Leaving California doesn’t automatically mean you leave behind tax liability on equity. The state aggressively enforces sourcing rules for stock-based compensation.
If you’ve been granted options during your California years, expect FTB scrutiny even if you’re in Florida or Texas now.
Call to Action
Received stock options while working in California but moved out?
Book a multi-state tax review with Anshul Goyal, CPA, EA, FCA
Anshul will help you:
- Determine CA-sourced portion of equity gains
- Prepare Form 540NR accurately
- Avoid penalties and FTB back tax notices
Stay compliant across state lines:
https://calendly.com/anshulcpa/
Anshul Goyal, CPA, EA, FCA
Anshul brings 15+ years of U.S. and international tax experience. He specializes in helping online sellers, foreign founders, and U.S. residents with IRS and multi-state compliance. Known for his deep knowledge in Shopify and Amazon seller tax strategy, Anshul has helped hundreds of entrepreneurs minimize taxes and scale legally.
Disclaimer
This blog is for informational purposes only and does not constitute legal or tax advice. Please consult a qualified tax professional regarding your individual tax situation.
Top 5 High-Searched FAQs for 2025
1. Do non-residents pay CA tax on stock options?
Yes, if the work was performed in CA during the vesting period.
2. How does CA calculate sourcing for options?
Based on the percentage of services performed in CA over the vesting term.
3. Are ISOs taxed differently in CA?
Yes. ISOs may not trigger state income tax until sale, but still require tracking.
4. What if I never lived in CA but worked remotely for a CA company?
You may still owe CA tax if your services were effectively connected to the state.
5. What form do I use to report CA income if I’m no longer a resident?
Form 540NR is the correct nonresident income tax return.