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An Engineer’s guide to Stock Options

blog.alexmaccaw.com

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Re: An Engineer’s guide to Stock Options

#161

Post by walshemj »

Taniwha wrote: post #154
walshemj wrote: post #145

Earlier quoted context omitted.

How is it correct its perverse for many reasons. 1 How can I owe tax on something that has no value. 2 I think we can all agree that Employee ownership is considered a good thing therefore any law which penalizes this is bad law if not actively immoral. The law should only tax you when you have an actual +ve capital gain. (the need for sensible vesting and taper relive to avoid tax avoidance is of course a given). On…

Well the answer to 1 is that you owe tax on the increase of value from 10c to $2 (your option price and the current value of the stock when your bought it at 10c a share - if you have 10k shares you might pay $1k to exercise the options and find yourself owing roughly 1/3 of 10k*$1.90 or ~$6k in tax on your paper gain. The usual reason you are doing this is because you expect the stock to appreciate further say to $1…

That is a capital gain not income and just saying you can claim the loss next year doesn't do you much good if your bankrupt or unemployed.

By your argument all US pension funds should pay income tax on any capital gains.

And just saying well you cant pay your tax we will take your pension is just taking the piss (to be blunt).

Forget reforming the NSA/CIA its the IRS I would be worried about

Re: An Engineer’s guide to Stock Options

#162

Post by Taniwha »

walshemj wrote: post #161
Taniwha wrote: post #154

Earlier quoted context omitted.

Well the answer to 1 is that you owe tax on the increase of value from 10c to $2 (your option price and the current value of the stock when your bought it at 10c a share - if you have 10k shares you might pay $1k to exercise the options and find yourself owing roughly 1/3 of 10k*$1.90 or ~$6k in tax on your paper gain. The usual reason you are doing this is because you expect the stock to appreciate further say to $1…

That is a capital gain not income and just saying you can claim the loss next year doesn't do you much good if your bankrupt or unemployed. By your argument all US pension funds should pay income tax on any capital gains. And just saying well you cant pay your tax we will take your pension is just taking the piss (to be blunt). Forget reforming the NSA/CIA its the IRS I would be worried about

In the US capital gains are by default taxed as income, you can claim a special lower capital gains tax rate if you hold an asset for greater than a minimum time (2 years?)- stock options are a bit special in that you don't actually 'hold them' until they vest - what you have to do if you buy them early is file with the IRS and tell them that you have made this investment, specify how many shares and what the value was - it is explicitly to get this lower capital gains tax rate that people do the early purchase thing.

US pension funds (at least personal funds like IRAs and 401Ks) are pre-tax - that is the money you put into them comes from your gross, before you pay tax on it - you still have to pay the tax when you withdraw money (including any increase) from them - the idea is that you put money in to avoid tax at your highest marginal rate, and remove it and pay tax at a much lower marginal rate when you are retired. However you do still have to pay income tax on money earned in pension plans.

As to the fact that you can't claim the tax loss if you're unemployed or bankrupt, that was part of the thing I was trying to point out, buying your options after their value has increased can put you into a dangerous situation (I wasn't trying to justify it, just explain to the unwary that it can, and has, happened)

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