81–90 of 232 posts
Earlier quoted context omitted.
True, but is it the IRS' fault if the corporation refuses to create a market for their shares? If the IRS didn't tax these shares, it would quickly become a tax shelter of epic proportions, no?
A key factor in whether that's truly a tax shelter is control. If your not in a position to make or even influence decisions about liquidity, you're not exactly a voluntary participant.
It's quite common to owe taxes today for gains on the value of your stock -- which is an illiquid asset you can't sell. This puts employees in the position of shelling out cash to keep something that rightfully belongs to them, or simply abandoning it (failing to exercise) when they leave the company. This bill would defer taxes on gains up to 7 years, or until the company goes public.
If you are awarded stock options, an you exercise them, you have to file an 83(b) election within 90 days or else you are liable on all paper gains in the value of your stock.
Even if you file an 83b election, you are still liable for paper gains between the value of your options when you were granted them and the value when you exercised.
For example, if you were awarded options with a strike price of $5 and the company raised a new round of funding and the 409A valuation (& strike price of the new options) has risen to $15 per share, the IRS considers that you now owe taxes on $10 of income / share. In other words, it costs you not $5 / share to exercise but ~$8.50 including taxes.
So the tricky part about options is that they require money to exercise, money that you often don't have ready, in order to obtain an asset that is (a) not liquid and (b) may decline in value (c) you often can't sell due to transfer restrictions.
For example: one early engineer at Zenefits had to pay $100,000 in taxes for exercising his stock....and then all the crap hit the fan, and he likely paid more in taxes than his shares will end up being worth. Ouch.
As a result of this problem with options, many startups -- especially later-stage ones like Uber -- choose instead to offer RSUs, which are basically stock grants as opposed to stock options. You don't have to pay any money to "get" them like you do for options.
However, the IRS considers stock grants, unlike options, immediately taxable income. If you get 10,000 RSUs per year, and the stock is valued at $5/share by an auditor, you now have to pay taxes on $50,000 of additional income, for an asset that you likely have no way of selling.
Some startups allow "net" grants -- which basically means they keep ~35% of your stock in lieu of taxes. That solves the liquidity problem, but offering this is completely at the discretion of the startup and some don't, which leaves employees at the mercy of the IRS, again having to pay cash on paper gains of an illiquid asset.
Earlier quoted context omitted.
the US is in a weird position where the federal government actually has very little power. But it has tax power. So they just use taxes as a way to manipulate things in the way they want. But as far as I understand, the US tax system is also one of the 2-3 most complicated in the world... Being an permanent resident and not being used to this from my home country, Im making a lot of suboptimal financial decisions pur…
You could find an accountant to do your taxes. It would probably cost much less than you'd make consulting, and sometimes they can find ways to save you more money than you paid.
Most employees get hit by the AMT and the step up in basis when exercising their incentive employee stock options, and from just skimming the bill, I don't see how that is prevented.
If the income is deferred, I would imagine that it wouldn't apply to AMT calculations. It'd be nice for that language to be explicit though. Regardless, the Obama Administration "strongly opposes" the bill in its current form since it would "increase the Federal deficit by $1 billion over the next 10 years." https://www.whitehouse.gov/sites/default/files/omb/legislati... I wonder how often bills with this "strong opp…
This is amazing news. Some context: It's quite common to owe taxes today for gains on the value of your stock -- which is an illiquid asset you can't sell. This puts employees in the position of shelling out cash to keep something that rightfully belongs to them, or simply abandoning it (failing to exercise) when they leave the company. This bill would defer taxes on gains up to 7 years, or until the company goes pub…
Would this bill actually help this scenario? I'm unclear if deferring the tax liability just means that you pay the same amount of tax later, or if you can write off capital losses like this at the time your liability is due.
This is amazing news. Some context: It's quite common to owe taxes today for gains on the value of your stock -- which is an illiquid asset you can't sell. This puts employees in the position of shelling out cash to keep something that rightfully belongs to them, or simply abandoning it (failing to exercise) when they leave the company. This bill would defer taxes on gains up to 7 years, or until the company goes pub…
> Only startups offering stock options to at least 80 percent of their workforce would be eligible for tax deferrals, and a company’s highest-paid executives would not be able to defer taxes on their stock under the legislation. I understand the desire to avoid a regressive taxation system, but why is it that every tax rule we create comes with 2x the amount of caveats and rules? Our tax system is becoming a mess. At…
the US is in a weird position where the federal government actually has very little power. But it has tax power. So they just use taxes as a way to manipulate things in the way they want. But as far as I understand, the US tax system is also one of the 2-3 most complicated in the world... Being an permanent resident and not being used to this from my home country, Im making a lot of suboptimal financial decisions pur…
Earlier quoted context omitted.
That it will become liquid one day. If you get to make all sorts of incredible options deals under the cover of "not in the market" then you can simply make lots of situations like this happen and simply bring them to market when there is no risk involved for you anymore.
So? Why should taxes be paid unless there are actual gains? What's the problem with waiting until gains are realized to tax them? If there's still risk, taxes are paid, and the risk materializes and no gains are made at the end, how is that fair?
Exactly. And what the article or the linked Bill summary fails to make clear (unless I missed it) is whether the tax amount is based on the value of the stock the day the options are exercised, or when the tax is paid. By the time the stock becomes liquid, it might be worth far less than that it was when the options were when the options were exercised. Maybe far less than the actual tax bill. And what happens if the stock's value goes to zero?
I'm with you on this. I don't see why they can't tax this like any other stock trade, where you pay tax on the actual monetary gain, after it has been realized.
> Only startups offering stock options to at least 80 percent of their workforce would be eligible for tax deferrals, and a company’s highest-paid executives would not be able to defer taxes on their stock under the legislation. I understand the desire to avoid a regressive taxation system, but why is it that every tax rule we create comes with 2x the amount of caveats and rules? Our tax system is becoming a mess. At…
A complicated tax system is perfectly fine if its control logic is algorithmic and its parameters are easily found by the taxpayer. That's already somewhat true, since tax law is written by lawyers and accounts, who make excellent programmers if given appropriate training. Unfortunately, for me at least, legal English is 1000x harder to parse and understand than any nonesoteric programming language.
Expecting a normal human being to navigate anything complex in unreasonable. Complex is a relative term. By definition, if something is complex, it is difficult for an average person to navigate.
I know where you're going with this, if something is consistently coherent we can use computers to manage the task and to some extent, things like Turbo Tax help.
But ... there's no reason we can't have a simple tax system. None at all.
Earlier quoted context omitted.
Sounds like it's 80% of employees must have been offered stock in the year you began employment. My guess is that this applies in most common cases, although I wonder what the situation they were trying to guard from was...
Would this be the case if your options have a 1 year cliff?