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What would the taxes be if I exercise my startup options?

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Re: What would the taxes be if I exercise my startup options?

#21

Post by schmichael »

delinka wrote: post #11

I recently talked to a CFO who put it like this: For the sake of planning : The difference between what you paid (you have to exercise options for this to matter) for your shares and what the are worth (see the company's most recent valuation) is counted as income for the current tax year. If you hold the shares for more than a year, the money you make on a sale is subject to capital gains tax. This is indeed affecte…

I hired a certified tax professional; he had never handled ISOs before and got it wrong. I did it myself, and it wasn't really that bad. Hired a different CPA to double check it, and he said it looked fine.

That being said I still suggest to everyone who has never been through it before to get a professional involved.

Re: What would the taxes be if I exercise my startup options?

#22

Post by logfromblammo »

mahyarm wrote: post #16
logfromblammo wrote: post #2

I can hear all the non-US persons reading this article and laughing about all the insane idiocy that we put up with from the US tax code and IRS. All US persons have to put up with at least this amount of calculation every year (otherwise pay more than is strictly necessary, or possibly suffer penalties and fines later), and the details constantly change with the political tides. This is why tax reform crops up as an…

The pain with american stock options is you have to pay tax on exercise & liquidation with private non-liquid stock. When you exercise stock options in canada you only have to pay on actual liquidation, not on exercise. So for example you have an option for 0.10, the FMV is 0.50 when you exercise and you eventually liquidate at 1.00. In the USA you have to pay tax in the 0.40 'gain' right when you exercise. Then when…

It's worse. In some years, the gain when exercised was treated as ordinary income from your employer. So unless you filed a bunch of extra forms, the 0.40 per share might have been taxed as ordinary income on your W-2 from your employer, and also reported on a 1099 from your brokerage. Then it could have been reported again when you liquidated.

This is exactly what happened to me in 2002. The IRS wanted me to pay about 180% of what I actually earned from an options transaction in taxes. The employee stock purchase plan interaction only made it worse, thanks to the difference between long-term and short-term capital gains.

It was a complete CF, and made me ultra-paranoid about non-paycheck compensation forever after.

Don't just consult a professional. Form an angry mob and yell at some politicians. Try to get paid for your work with cash instead of options.

Re: What would the taxes be if I exercise my startup options?

#24

Post by chaqke »

logfromblammo wrote: post #17
cgearhart wrote: post #3

Earlier quoted context omitted.

Tax reform never survives because there is no consensus on how it should be fixed. Some folks think we should "simplify" by eliminating deductions - things like home mortgage interest, child care expenses, medical expenses & health insurance premiums. Other folks think we should "simplify" by eliminating corporate tax breaks & subsidies, and change how we tax things like stock trades & financial instruments. Still ot…

Here's an idea on how to simplify. The IRS sends you a summary from all your various W-2s and 1099s for the year. It has two numbers: what you earned as income, and how much you already paid for income tax this year. And it sends you your tax form. If you earned less than the median annual income for this year, you owe zero. If you paid anything already, you get all of it back with the enclosed check. If you earned m…

Intuit (owner of TurboTax) lobbied against the "government doing your taxes" for you.

Re: What would the taxes be if I exercise my startup options?

#25

Post by toast0 »

bmcfeeley wrote: post #20

How concerned should I be about my employer (sizable company, ~300 employees) being reticent to divulge our 409A valuation with me? I've had a hard time (read: never did get; only got my options' fractional ownership in percentage terms after long nagging email chains) in the past getting any information to this effect, and we just raised another round a few months back, so I would like to estimate my tax burden, but…

If you're eligible to exercise any options, I would be concerned; you can't make an informed decision without knowing the tax consequences. You might want to phrase it as you'd like to exercise some options, but you need to know the 409a valuation so you know how much AMT you can afford.

If you're not yet vested and there's no early exercise provision, you don't need to be super concerned, since you can't take any action anyway; but I would be sure you're getting the compensation that you want in a form you can value (salary).

Re: What would the taxes be if I exercise my startup options?

#26

Post by harryh »

bmcfeeley wrote: post #20

How concerned should I be about my employer (sizable company, ~300 employees) being reticent to divulge our 409A valuation with me? I've had a hard time (read: never did get; only got my options' fractional ownership in percentage terms after long nagging email chains) in the past getting any information to this effect, and we just raised another round a few months back, so I would like to estimate my tax burden, but…

Very concerned. They have a legal obligation to tell you this number so that you can properly pay your taxes. Companies that aren't willing to share this data are reasonably likely to be screwing you.

Re: What would the taxes be if I exercise my startup options?

#27

Post by eropple »

logfromblammo wrote: post #17
cgearhart wrote: post #3

Earlier quoted context omitted.

Tax reform never survives because there is no consensus on how it should be fixed. Some folks think we should "simplify" by eliminating deductions - things like home mortgage interest, child care expenses, medical expenses & health insurance premiums. Other folks think we should "simplify" by eliminating corporate tax breaks & subsidies, and change how we tax things like stock trades & financial instruments. Still ot…

Here's an idea on how to simplify. The IRS sends you a summary from all your various W-2s and 1099s for the year. It has two numbers: what you earned as income, and how much you already paid for income tax this year. And it sends you your tax form. If you earned less than the median annual income for this year, you owe zero. If you paid anything already, you get all of it back with the enclosed check. If you earned m…

That sounds great, except it has absolutely nothing to do with "half plus one" in the first place. It has to do with electable legislators plus their interest in pushing for this.

Re: What would the taxes be if I exercise my startup options?

#28

Post by ant6n »

logfromblammo wrote: post #17
cgearhart wrote: post #3

Earlier quoted context omitted.

Tax reform never survives because there is no consensus on how it should be fixed. Some folks think we should "simplify" by eliminating deductions - things like home mortgage interest, child care expenses, medical expenses & health insurance premiums. Other folks think we should "simplify" by eliminating corporate tax breaks & subsidies, and change how we tax things like stock trades & financial instruments. Still ot…

Here's an idea on how to simplify. The IRS sends you a summary from all your various W-2s and 1099s for the year. It has two numbers: what you earned as income, and how much you already paid for income tax this year. And it sends you your tax form. If you earned less than the median annual income for this year, you owe zero. If you paid anything already, you get all of it back with the enclosed check. If you earned m…

So two tax brackets eh. And no taxes below median income!

Re: What would the taxes be if I exercise my startup options?

#29

Post by lgcoleman »

spacehome wrote: post #19
delinka wrote: post #11

I recently talked to a CFO who put it like this: For the sake of planning : The difference between what you paid (you have to exercise options for this to matter) for your shares and what the are worth (see the company's most recent valuation) is counted as income for the current tax year. If you hold the shares for more than a year, the money you make on a sale is subject to capital gains tax. This is indeed affecte…

> When you file your taxes: Hire someone; don't try to do this yourself. I don't necessarily agree with this. The median person intelligent enough to work for a successful startup is competent enough to handle the tax implications of stock option exercise. True, it's time consuming to read enough to know what you're doing (e.g. what forms need to be filed), but the actual paperwork and calculations are not complex.

Ok. I'm a tax professional so I may have a vested interest. But the problem is there are a lot of questions you may not know to ask. Sure, filling out the forms is the easy part. Knowing what goes where, why & what carryover provisions apply is the hard part.

For example the OP just said options. He didn't say if these were ISOs (although my response assumed they were). Even if they were ISOs, were the options for restricted shares? Did he make an 83(b) election at grant? What if he thought they were ISOs but they were really non-qualified options or restricted stock units. (I've seen that happen but by the time I got the info as a preparer, it was too late to do anything except pay the tax.) These all are taxed and reported differently.

If you're talking a lot of money, I would find a qualified tax professional. Make sure the person you hire has experience with stock compensation.

You should find this someone now, before you exercise, to make sure you're planning for the tax implications. On the OP's exercise, there will be no tax withheld on the transaction, but the US has a pay-as-you go tax payment requirement, so the AMT tax on the exercise could be due now, rather than April 15...but there are safe-harbor rules that could mitigate this requirement....see what I mean... there's an awful lot to know which is why we're required to have so much annual CPE.

CPAs are not the only option and not all CPAs specialize in taxation. Enrolled Agents are licensed by the IRS, rather than the states like CPAs & attorneys. Whoever you hire, make sure they have experience in this area.

Good Luck!

Re: What would the taxes be if I exercise my startup options?

#30

Post by shostack »

toast0 wrote: post #25
bmcfeeley wrote: post #20

How concerned should I be about my employer (sizable company, ~300 employees) being reticent to divulge our 409A valuation with me? I've had a hard time (read: never did get; only got my options' fractional ownership in percentage terms after long nagging email chains) in the past getting any information to this effect, and we just raised another round a few months back, so I would like to estimate my tax burden, but…

If you're eligible to exercise any options, I would be concerned; you can't make an informed decision without knowing the tax consequences. You might want to phrase it as you'd like to exercise some options, but you need to know the 409a valuation so you know how much AMT you can afford. If you're not yet vested and there's no early exercise provision, you don't need to be super concerned, since you can't take any ac…

Would I be accurate in restating your last point as "if they won't tell you what the shares are valued at or how big the pool is, and they just give you a percentage, you have no clue how much the equity is actually worth?"
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