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House Passes Employee Stock Options Bill Aimed at Startups

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Re: House Passes Employee Stock Options Bill Aimed at Startups

#101

Post by dragonwriter »

MichaelBurge wrote: post #62
brianwawok wrote: post #47

Earlier quoted context omitted.

So you cap income tax at 2%. Congratulations you just tripled property tax and made sales tax 20%. Taxes are like wackamole. You can't just limit 1 tiny piece and expect anything to change. Furthermore you can't just lower the total take unless you want to explain where the cut is coming from. Less school funding? Less roads? Less police? Less Army? More debt?

My understanding is that the federal government cannot impose a property tax, without just distributing it to the states by population. My reading of the commerce clause is that they couldn't impose a sales tax on in-state commerce. So it's not like these went away after they gained the power to assess an income tax: they were never an option. As a general rule, you could remove any government agency created with the…

> My reading of the commerce clause is that they couldn't impose a sales tax on in-state commerce.

(1) The commerce clause is a grant of power, not a limit. It's indisputable that the commerce clause does not authorize a tax on in-state commerce, but it doesn't prohibit one, either. So we need to look beyond the commerce clause and ask if a federal sales tax is authorized anywhere else.

(2) The dollar value of sales is income, derived from sales. The 16th Amendment gives Congress the authority to "lay and collect taxes on income, from whatever source derived, without apportionment among the several states". Therefore, a federal tax on the gross income from sales is authorized by the 16th Amendment.

(3) But, wait, we don't even need the 16th Amendment. There's a special word for a tax on sales of goods -- its called an "excise". And its an express Constitutional power of Congress even before any amendments, in the Tax and Spending Clause, with the restriction that they must be uniform throughout the United States.

Re: House Passes Employee Stock Options Bill Aimed at Startups

#102

Post by gtrubetskoy »

I still don't understand why taxes are owed. If an option at the time of grant is worth $0 (which is how it's typically done or is that not the case?), then you don't owe anything to the IRS until you exercise the option, i.e. buy shares at the option price and sell them at presumably higher valuation and make some money, at which point you will need to part with some of it because it's income.

But if you never exercise the options, then you never owe any tax. What am I missing here?

Re: House Passes Employee Stock Options Bill Aimed at Startups

#103

Post by toomuchtodo »

gtrubetskoy wrote: post #102

I still don't understand why taxes are owed. If an option at the time of grant is worth $0 (which is how it's typically done or is that not the case?), then you don't owe anything to the IRS until you exercise the option, i.e. buy shares at the option price and sell them at presumably higher valuation and make some money, at which point you will need to part with some of it because it's income. But if you never exerc…

If you exercise your ISO options (because of option expiration clauses, typically 90 days after you leave a company), but then don't (or can't due to no market for the shares) immediately sell those shares, the spread between the option grant price and the current 409A valuation is due as AMT tax. You have not realized an event where cash is in your pocket, but you still owe tax on the "gain".

You ask what does it matter if the options aren't exercised. Excellent question! It means all that potential compensation you were offered (because you took a lower salary usually in return for options) is now worthless. People don't want to work for free, or have their potential future compensation evaporate.

Re: House Passes Employee Stock Options Bill Aimed at Startups

#104

Post by whamlastxmas »

revo13 wrote: post #55
whamlastxmas wrote: post #49

Earlier quoted context omitted.

High consumption tax creates an incentive to not spend your money, which is bad.This also means the millionaires and billionaires of the world get to invest their money tax-free to earn even more money, often with rent-seeking, while 95% of America is getting taxed essentially up front on the vas majority of their earnings because it gets spent on stuff like housing, food, and healthcare. This creates a massively reg…

So you are content with having a tax system that treats you like a 1%er in the event that you cash in a payday (say $1mil - 35-40%) during a given year, despite the fact that you may have worked your whole life at a middle class level, scraping to save? A consumption tax would allow individuals to actually make choices about how/when they are taxed. Lets be honest, people will still want their "stuff". If they have m…

If I normally make 60k a year and get a one-time payday of $1MM, I'll be paying around 13% more in income tax on that million dollars than I do on my regular income. Even with AMT it isn't a huge deal. This seems pretty reasonable to me. It's not perfect but it's not a reason for completely eliminating income tax. It's a reason for having exemptions, which is exactly what this article is about.

>If they have more money in their pocket, they will spend. That is what America is built on.

This is simply not true for people with millions of dollars. Look at the percentage of income spent for someone making $500k a year, and the percentage spent by Bill Gates or any other billionaire. It's a huge difference, and there's a huge difference between both of those groups and someone making $100k a year who is usually spending almost all of their income. Consumption tax is also completely ignoring the "spend it overseas" and million other loopholes.

I am not convinced any method of consumption tax I've read about, regardless of safeguards, would retain the same level of tax income the government receives while also not increasing the burden on lower and middle income households. The vast majority of tax revenue comes from an extremely small percentage of earners, and you'd be losing the vast majority of that income if you only taxed their spending.

The only way I can see this working is if you almost exclusively taxed things rich people bought. Increase sales tax on homes over $1 million, cars and boats over $200k, private jets, etc. But the tax rate on these would have to be ridiculously high, more than doubling their costs. All the rich people would just buy them overseas.

Re: House Passes Employee Stock Options Bill Aimed at Startups

#105

Post by kornish »

gtrubetskoy wrote: post #102

I still don't understand why taxes are owed. If an option at the time of grant is worth $0 (which is how it's typically done or is that not the case?), then you don't owe anything to the IRS until you exercise the option, i.e. buy shares at the option price and sell them at presumably higher valuation and make some money, at which point you will need to part with some of it because it's income. But if you never exerc…

Frequently, companies have a 90-day exercise window on options, meaning that employees have to exercise within 90 days of termination of employment. What that often translates into is employees sticking around indefinitely at companies whose value has grown during their tenure because they:

- can't exercise options and leave, because they would have to pay potentially huge taxes on an illiquid asset

- don't want to lose their stock, which makes up a nontrivial part of their comp for effort already invested in the company

So, your understanding is correct - but people often don't want to wait for a liquidity event to be able to exercise and don't want to miss out on something they already earned.

An example: as I hear it, there are quite a few early Uber employees sitting on tens or hundreds of millions of options who can't leave because if they exercise, they'd be slammed with millions in taxes. Since Travis Kalanick disallows secondary market trading of Uber stock, they wouldn't be able to sell stock to help pay the taxes, and thus can't afford to exercise but can't afford to leave. That's how you end up with employees who just come in to work the minimum possible amount waiting for an exit.

Re: House Passes Employee Stock Options Bill Aimed at Startups

#106

Post by tyleraldrich »

__jal wrote: post #92
matt_wulfeck wrote: post #57

> 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…

> At this rate soon nobody will be able to file their own taxes without an accountant to sort through the muck. And complicated to systems tend to benefit the wealthy. It also heavily benefits Quicken. Along with HR Block, they heavily lobby against any effort that simplifies the tax code. Capitalism, American-style.

Intuit is a pretty funny company. They try to make TurboTax as simple as possible for the average American (most Americans can fill out a 1040EZ and be done in minutes), but at the same time try to make taxes as complicated as possible so that they can sell services around that. It's both smart and infuriating .

Re: House Passes Employee Stock Options Bill Aimed at Startups

#107

Post by gtrubetskoy »

toomuchtodo wrote: post #103
gtrubetskoy wrote: post #102

I still don't understand why taxes are owed. If an option at the time of grant is worth $0 (which is how it's typically done or is that not the case?), then you don't owe anything to the IRS until you exercise the option, i.e. buy shares at the option price and sell them at presumably higher valuation and make some money, at which point you will need to part with some of it because it's income. But if you never exerc…

If you exercise your ISO options (because of option expiration clauses, typically 90 days after you leave a company), but then don't (or can't due to no market for the shares) immediately sell those shares, the spread between the option grant price and the current 409A valuation is due as AMT tax. You have not realized an event where cash is in your pocket, but you still owe tax on the "gain". You ask what does it ma…

I see... So what should in theory fix it is if the company granting you the options also provided a guarantee that they will buy shares from you should you be inclined to sell them (A sort of a "sell at current price" option I suppose). This way you can exercise the options, and sell enough shares to cover the tax obligation and hang on to the rest.

Re: House Passes Employee Stock Options Bill Aimed at Startups

#108

Post by ynniv »

grellas wrote: post #100

The original point of ISOs was to offer to employees the opportunity to take an economic risk with stock options (by exercising and paying for the stock at the bargain price) while avoiding the tax risk (by generally not recognizing ordinary income from that exercise and being taxed only at the time the stock was sold, and then only as a capital gains tax). AMT has since emerged to devour the value of this benefit. B…

If one receives options before they are valuable, then there is a high valuation during which assets are illiquid and one defers taxes, then the value collapses as the company folds, are you still stuck with a huge tax bill? If so nothing has been fixed. There's no point in patting politicians on the back if there is a simple fix and instead they passed a complicated partial fix.

Re: House Passes Employee Stock Options Bill Aimed at Startups

#109

Post by throwaway2016a »

grellas wrote: post #100

The original point of ISOs was to offer to employees the opportunity to take an economic risk with stock options (by exercising and paying for the stock at the bargain price) while avoiding the tax risk (by generally not recognizing ordinary income from that exercise and being taxed only at the time the stock was sold, and then only as a capital gains tax). AMT has since emerged to devour the value of this benefit. B…

I'm at a startup and haven't exercised for this exact reason I was hoping this was to fix that.

It's unclear to me that if I defer it and the company goes out of business before then, does that mean I pay no taxes?

And if the price goes up do I pay capital gains or income tax on the difference in value between now and what it went up to? What about the difference between now and my excise price.

Re: House Passes Employee Stock Options Bill Aimed at Startups

#110

Post by bluetwo »

grellas wrote: post #100

The original point of ISOs was to offer to employees the opportunity to take an economic risk with stock options (by exercising and paying for the stock at the bargain price) while avoiding the tax risk (by generally not recognizing ordinary income from that exercise and being taxed only at the time the stock was sold, and then only as a capital gains tax). AMT has since emerged to devour the value of this benefit. B…

Thank you for this clarification. I was wondering how holding these options would screw the average employee, since I didn't think the value was taxable, but the impact on the AMT is the piece I was missing.

I've got to think that once we start making loopholes in the AMT there will be no stopping it, and it'll quickly turn back into the regular tax code.

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