That's half true at best. Capital gains are reported on your tax return as a form of income. The rate at which they're taxed is up to each jurisdiction. For fe

That's half true at best. Capital gains are reported on your tax return as a form of income. The rate at which they're taxed is up to each jurisdiction. For federal taxes, long-term capital gains happen to be taxed at a lower rate than other income. For California state taxes, there is no such distinction - all income, including capital gains, is taxed on the same progressive taxation schedule. So for Californians, getting paid in stock options usually results in lower federal taxes, but no change in state taxes. Now, where it gets interesting is with local jurisdictions. In California, cities and counties are not allowed to collect income taxes. However, San Francisco does collect payroll taxes. Paying your employees in options could reduce the amount that counts as payroll, but only if the stock options are increasing in value quickly. If your employees are getting all of their money from you, the city gets its cut. If your employees are getting some of their money from you and some from the stock market, then the city loses out on the latter portion - but most employees should consider that a bonus and negotiate pay primarily based on current value, so that shouldn't matter too much in the long run. What the city (but not the state!) definitely misses out on taxing is capital gains on wealth already accrued. When I make money on investments (not so much this year, but hypothetically), the city doesn't get anything from that, because there's no payroll involved. The feds get some of it (at the reduced capital gains rates, assuming I've held for a year); California gets some of it (at the full income tax rate); San Francisco gets none. But again, that story is only for investment income on money I already had, not for new stock compensation.