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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

#331

Post by kelnos »

School-Cotton wrote: post #52
seattle_spring wrote: post #47

Earlier quoted context omitted.

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

Yes it is publicly traded. So, how does it work with privately traded companies. Talking about RSUs, not options. What is the difference between "release of the underlying shares" and "vest" ?

It currently works no differently with private companies. It's a common misconception that RSUs are taxed when they vest; they're actually taxed at delivery/release, which need not be the same as the vest date. At a public company there's no reason to make those two dates different (unless you're subject to trading restrictions and the vest dates are during blackout periods). At a private company your RSUs can vest but not be delivered/released until later.

Re: Don’t Tax Options and RSUs Upon Vesting

#332

Post by kelnos »

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…

> 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.

By that logic, you should have to pay tax on publicly-traded stocks that you own daily, every time the price goes up, even if you don't sell it.

Taxing unrealized gains is insanity. How does it make sense to levy a tax on income that cannot be converted into money?

> 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 a bit naive, if that's the case. I would never expect people to opt out of legal means to reduce their tax burden.

Re: Don’t Tax Options and RSUs Upon Vesting

#333

Post by godzillabrennus »

sulam wrote: post #188

I'm going to say something that may be unpopular. Hopefully my karma can handle it. The latest analysis I saw of this from Fenwick says that this is only applying to non-qualified stock options. Employees get NSOs when you vest too much to get ISOs in a calendar year, based on the vesting schedule and value at the time of grant, not fair market value at time of vesting of the option. That limit is $100K, for people w…

As a consultant who gives price breaks to early stage startups by taking options on a NQSO agreement this is often the only way to avoid getting taxed. This will suck.

Re: Don’t Tax Options and RSUs Upon Vesting

#334

Post by orangecat »

aresant wrote: post #7

"But, sadly, I don’t think this is really about what makes sense. It is about politics." Clearly this proposal is targeted directly at private SV and tech companies. And the mortgage deduction and state tax write off proposals are targeted at California / NY. Outside of just a big FU from the Republicans to largely Democratic states what is the end game? E.g. - what are the Republicans actually negotiating for, assum…

And the mortgage deduction and state tax write off proposals are targeted at California / NY.

I'm sure targeting wealthy coastal liberals is a feature for many Republicans, but as nearly every economist will tell you the mortgage interest deduction really is awful and should be nuked from orbit. It's probably the most intelligent thing this Congress has proposed, even if it is by accident.

Re: Don’t Tax Options and RSUs Upon Vesting

#335

Post by greenleafjacob »

trothamel wrote: post #91
t_fatus wrote: post #51

Earlier quoted context omitted.

Options and RSUs gain value the day you pay for the underlying stocks, not the day you're allowed to buy a stock which could later in time become worthless. don't forget they're aimed at employees so they can share the value created by the company they work within, and that these employees will pay taxes in time when they extract any value from their companies

Don't they gain value at both times? I mean, stock options are something people pay for.

The intrinsic-value of the options is required to be zero (strike price = FMV) at the time of grant. As for the time-value, how exactly would you calculate that for tax purposes?

Re: Don’t Tax Options and RSUs Upon Vesting

#336

Post by greenleafjacob »

kolbe wrote: post #285
heimidal wrote: post #128

Earlier quoted context omitted.

It's not income if you never exercise the option. Imagine starting as a senior-level manager at a company that's a few years into its life. They provide you with a salary of $150k/year and 100,000 options at $1 with a standard four-year vesting schedule. In the first year, the company's fair market value increases to $2/share. Your tax liability just increased as though you made an extra $25k, so you'll need to come…

That sounds no less fair than someone who bought a home for $100k in 1980 who's seen its value appreciate to $5mm, and now has to pay $50k a year in property tax. That sounds no less fair than a family liquidating its estate because they can't afford the estate taxes. That sounds no less fair than a health-conscious person taking care to never drink or do drugs paying 10x more for socialized healthcare to pay for the…

You can sell a home to cover property taxes, or even reverse mortgage to get the cash flow. You can't sell private company stock, you can't even encumber it with a lien.

Re: Don’t Tax Options and RSUs Upon Vesting

#337

Post by exelius »

austenallred wrote: post #318
exelius wrote: post #181

Earlier quoted context omitted.

I think the key here is that the valuations would change and likely be far more realistic. We certainly haven't seen the whole story on cryptocurrencies to know what regulation needs to apply, so I'll withhold any speculation there. But I have a feeling that with the amount of data a blockchain-based security gives you, the need to restrict non-publicly traded entities somewhat goes away (since you can always audit a…

Why would valuations change and be more realistic if you tax illiquid stock people can’t afford to pay taxes on the gains of? Valuations would be artificially low if that were the case.

Not artificially low; the idea is to increase liquidity by tying said currencies to semi-liquid ETC/BTC (or whatever).

Right now, most post-money valuations are artificially high, which has its own set of problems. These companies are being valued as if they had already accomplished their objectives, and it’s solely because the lack of liquidity allows (and after several rounds of funding, requires) VCs to obfuscate reality and get big valuations that drive big headlines which become self-reinforcing.

In any case, it’s all speculative now, but in 2 years I bet we have this all figured out; and the regulators will probably catch up a few years after Trump is gone. Cryptocurrency has hit the critical inflection point where big banks are building platforms around blockchain. It’s not like this stuff isn’t already core business for Goldman et al.

Re: Don’t Tax Options and RSUs Upon Vesting

#338

Post by jalonso510 »

sk5t wrote: post #328
jalonso510 wrote: post #289

Earlier quoted context omitted.

Only a couple or reasons they'd deliverately do that. Most common is if the employee is outside the U.S. and not a U.S. taxpayer, making the distinction irrelevant. Or, if you plan to early exercise immediately upon receipt, you actually are better off with an NSO (due a shorter holding period for long-term capital gains treatment and there being no spread between exercise price and fair market value at the time of e…

My employer has issued _all_ option grants as NQSOs (with "normal" 4 year vesting, but also with 90 day exercise or forfeiture, with FMV clawback right, with rather tepid spread between preferred and common after seed). I'll be charitable and suppose the big old law firm wrote this out of startup inexperience and a very strong dose of CYA. Any suggestions on what to do about this?

Sounds pretty unfriendly, but no, no suggestions really - it's up to the company what they want to give you and some companies are just stingy like that. Wish I had something more for you.

Re: Don’t Tax Options and RSUs Upon Vesting

#339

Post by loeg »

sk5t wrote: post #268
loeg wrote: post #255

Earlier quoted context omitted.

Also — I don't see any problem with forcing companies to compensate employees in cash instead of employer equity. Especially for publicly traded companies, employees can go ahead, turn around and plow that cash into company stock if they want to. (RSUs are just cash in the form of stock anyway.)

The issue is that the companies that most depend on options/SARs/etc. to get off the ground do not have the cashflow. Otherwise it would not even be in their interests to grant equity.

Again, I don't see that as a problem. Instead of paying their employees in cash and dreams, they're forced to just pay in cash. If employees are less keen on the same amount of cash without the dream, too bad for companies too marginal to pay a prevailing wage.

Re: Don’t Tax Options and RSUs Upon Vesting

#340

Post by loeg »

8ytecoder wrote: post #313
loeg wrote: post #255

Earlier quoted context omitted.

Also — I don't see any problem with forcing companies to compensate employees in cash instead of employer equity. Especially for publicly traded companies, employees can go ahead, turn around and plow that cash into company stock if they want to. (RSUs are just cash in the form of stock anyway.)

I don't like the government literally making the choice for everyone. It's an incentive structure. It's like taxing a promise note to me that I'll be paid $x dollars in $y years. Options is an incentive which says I can't pay you as well as I'd like but instead I'll share the upside with you. Investors who put in cash are not taxed for the shares they receive. Options should be viewed similarly. It's like sweat-equit…

Options in a private company are a terrible compensation structure for employees. They're horribly complicated, and even under today's laws taxes are due before any profit is realized. If we want to keep the idea of ISOs as an alternative incentive structure, they should be taxed later rather than earlier — at the time they can be converted into some liquid asset (cash or publicly traded stock).

Practically, ISOs today are used primarily for two reasons beneficial to founders and investors: to pay employees in dreams rather than cash; and to claw back compensation from employees who leave the company (most employees who leave will never be able to exercise their options).

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