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Don’t Tax Options and RSUs Upon Vesting

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Re: Don’t Tax Options and RSUs Upon Vesting

#41

Post by trothamel »

Isn't this a change that makes the tax code fairer? It seems like options and RSUs have value associated with them. At the very least, the person who is receiving them considers them to have value. Stock options are traded on markets, and priced some how.

Part of the new tax plan seems to be trying to lower the tax brackets, in exchange for preventing people from avoiding taxes. That's why it seems to be doing things like taxing these options and the free food some companies supply their employees.

It isn't clear why income shouldn't be taxed just because it's supplied in a different way.

Re: Don’t Tax Options and RSUs Upon Vesting

#42

Post by jerf »

solipsism wrote: post #32
tome wrote: post #5

Earlier quoted context omitted.

> I do think it's a reasonable complaint to get taxed on something you can't liquidate. One way to sidestep this would be to force the taxing authority to take some of the options as payment, rather than cash. You've been granted 100 options at a value of $x each and the tax rate is 20%? Just give them 20 options. That way it doesn't matter what x is or whether the market is liquid!

But who would manage this federal portfolio?

Ah, the "beauty" of the US Federal tax system is that the answer is the same as everything else in the system: You. With You being liable for back interest and penalties if You screw it up. Basically the result would be an earmarking system, payable on exercise again, as opposed to time of receiving option.

That said, in the broad scheme of things it still seems workable. Startups may have to get used to also providing assistance with taxes for their initial employees. Honestly that's already not a bad idea even in the current environment.

Re: Don’t Tax Options and RSUs Upon Vesting

#43

Post by logfromblammo »

austenallred wrote: post #18

The importance of this change can’t be understated; this effectively kills compensation at startups in the form of equity, and would make startups completely unable to compete with incumbents. Anyone that has options at a company that grows quickly would be paying tens or hundreds of thousands in taxes to keep their equity, which is still effectively a very risky bet that a company will end up huge. No one would want…

What if your goal is for technical talent to prefer companies that make parts for the F-35 that actually function as intended, instead of companies that could be described as "Uber for cat-sitters" or "the Snapchat of Etsy-linked Tumblr posts" or "Pets.com with more tulip bulbs" or "like Facebook, except fronting for GRU instead of NSA"?

In that case, it would meet that goal very well.

What a pity it is that the technical talent, who might prefer lucking into big piles of windfall cash by working for the right unicorn, has no big national organization to lobby in favor of our interests, and speak out against this type of change. (If you're one of the folks that knee-jerk downvotes any mention of tech worker unions, that's what I'm talking about, so let's get that click out of the way.)

Re: Don’t Tax Options and RSUs Upon Vesting

#44

Post by seattle_spring »

xfactor973 wrote: post #36

I don’t quite follow how this is different. When I got rsu’s at my former company they sold a bunch at every vest date to pay for taxes. Isn’t that the same as what they’re talking about here?

Was your company publicly traded? The OP is referring to issues when the stock is illiquid.

Re: Don’t Tax Options and RSUs Upon Vesting

#45

Post by oneshot908 »

austenallred wrote: post #21
eldavido wrote: post #16

I think the way we do options in startups needs a more fundamental rethink. I wouldn't be too sad if the current system falls on its face. I like Buffett's proposal from a few years ago. They don't grant stock, they simply pay cash (bonuses) and if employees want to buy in, it's their money, after all. What's really needed is a way some group of insiders in a company can transfer shares among themselves or outsiders.…

That’s the point of options though - most of the time that “cash” doesn’t exist to be paid out in bonuses. Options are a bet that it will exist in the future. Why do startups pay lower salaries than Facebook? Because Facebook throws around $200-300k salaries and doesn’t care. Startups can’t do that, so it promises a piece of the pie if the company becomes big and successful instead.

At this point, unless you're C-suite, most startups are a really bad bet compared to the BigCos paying out anywhere from $250K-$1M annually depending on your skill set and experience.

What's happening now IMO is that the hot talent has figured this out and they have accepted positions at Tesla, Salesforce, Google, Facebook, Apple, or Amazon. That said, I know someone who walked away from a $10M package over 4 years to be the CTO of his startup. I wouldn't have, but everyone has to follow their path, right?

Re: Don’t Tax Options and RSUs Upon Vesting

#46

Post by austenallred »

trothamel wrote: post #41

Isn't this a change that makes the tax code fairer? It seems like options and RSUs have value associated with them. At the very least, the person who is receiving them considers them to have value. Stock options are traded on markets, and priced some how. Part of the new tax plan seems to be trying to lower the tax brackets, in exchange for preventing people from avoiding taxes. That's why it seems to be doing things…

The value associated with them is illiquid. I can’t necessarily sell my stock options for what they’re “worth,” so taxing them at that level makes them pretty much worthless.

It’s already taxed when I sell them - when I get dollars that I can spend. Taxing before then is (I hope) an oversight.

Re: Don’t Tax Options and RSUs Upon Vesting

#48

Post by conanbatt »

trothamel wrote: post #41

Isn't this a change that makes the tax code fairer? It seems like options and RSUs have value associated with them. At the very least, the person who is receiving them considers them to have value. Stock options are traded on markets, and priced some how. Part of the new tax plan seems to be trying to lower the tax brackets, in exchange for preventing people from avoiding taxes. That's why it seems to be doing things…

> and the free food some companies supply their employees.

This is a long standing question. Are costs of benefits like these one not taxed in the US?

The implications of not taxing that is huge.

Re: Don’t Tax Options and RSUs Upon Vesting

#50

Post by tome »

solipsism wrote: post #32
tome wrote: post #5

Earlier quoted context omitted.

> I do think it's a reasonable complaint to get taxed on something you can't liquidate. One way to sidestep this would be to force the taxing authority to take some of the options as payment, rather than cash. You've been granted 100 options at a value of $x each and the tax rate is 20%? Just give them 20 options. That way it doesn't matter what x is or whether the market is liquid!

But who would manage this federal portfolio?

The IRS would just immediately liquidate the options on the open market. Oh, there is no liquid market! So if the IRS can't do it why should individual startup employees be required to do it?

If the IRS are going to say that 100 options are worth $100x and charge tax based on that then they should be willing to accept 20 options in lieu of $20x.

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