Filing Taxes After Exercising Start Up Options • Hacker News Board

Re: Filing Taxes After Exercising Start Up Options

#41

Post by prostoalex » Wed, Feb 22, 2017, 5:27 AM UTC

maverick_iceman wrote: post #35

It is ridiculous to charge taxes based on fictitious paper valuations. I think taxes should be imposed only when shares are sold resulting in cash.

This opens a number of loopholes related mostly to income and estate tax avoidance. Shares of companies can be transferred to heirs for an arbitrary strike price and if they're never sold, there's no capital gain tax, no income tax and no estate tax liability generated. Rinse and repeat for multiple generations.

AMT is a quick fix to allow the government to tax the transfer of assets per se.

Re: Filing Taxes After Exercising Start Up Options

#42

Post by charliepark » Wed, Feb 22, 2017, 5:29 AM UTC

mbesto wrote: post #37

harryh wrote: post #7

Semi related to this blog post: A lot of people don't realize that you can exercise ISOs before they vest. If you are sure that you are going to be exercising your options there is no reason to wait until they vest and, in fact, there are disadvantages to doing so. As soon as you get your options (within 30 days. there is a time limit.) you tell your company you want to exercise then and file and 83B with the IRS ind…

This also requires that you have the money to pay for it at that moment too right? In other words - I get 10k options at $1 strike price, in order to exercise within 30 days I need to pay $10,000. Correct?

You'll need $10K to buy the options from your company. That's "Day 1". By Day 30 you need to file 83b with the IRS. And when it's time to pay your taxes for that year, you'll need to pay the IRS the taxes on the "income" you got from exercising the options. That is, if the strike price is $1 and the current market price for the shares is $3, the IRS sees that as a $20K income you made (even though you don't actually have liquid money).

If the delta between the strike price and the market price is large enough, you might actually pay the IRS more than you'll pay your company.

Re: Filing Taxes After Exercising Start Up Options

#43

Post by charliepark » Wed, Feb 22, 2017, 5:34 AM UTC

Apes wrote: post #5

kyleblarson wrote: post #3

I think you should at least mention the option of hiring a professional accountant.

Anyone have a professional accountant in San Francisco they would recommended for this sort of thing?

I have one in Marin I recommend. Email is in my profile.

Re: Filing Taxes After Exercising Start Up Options

#44

Post by [deleted] » Wed, Feb 22, 2017, 5:53 AM UTC

mnutt wrote: post #17

harryh wrote: post #12

Earlier quoted context omitted.

Yes, this is true. I will add that I have found that if you ask hard enough there is a good chance that companies that say that they don't do this at first will end up allowing you to do so. There's really no good reason for them not to.

I would imagine that the reason many companies are reluctant to do this (or at least don't advertise it) is because advising employees whether they should or should not do it amounts to giving financial planning advice. Asking hard enough probably means showing you have weighed your own financial situation and understand the risks.

[deleted]

Re: Filing Taxes After Exercising Start Up Options

#45

Post by [deleted] » Wed, Feb 22, 2017, 9:21 AM UTC

prostoalex wrote: post #41

maverick_iceman wrote: post #35

It is ridiculous to charge taxes based on fictitious paper valuations. I think taxes should be imposed only when shares are sold resulting in cash.

This opens a number of loopholes related mostly to income and estate tax avoidance. Shares of companies can be transferred to heirs for an arbitrary strike price and if they're never sold, there's no capital gain tax, no income tax and no estate tax liability generated. Rinse and repeat for multiple generations. AMT is a quick fix to allow the government to tax the transfer of assets per se.

[deleted]

Re: Filing Taxes After Exercising Start Up Options

#46

Post by seibelj » Wed, Feb 22, 2017, 3:07 PM UTC

laxatives wrote: post #25

seibelj wrote: post #21

If some random person on the internet wants to help me out. If I exercised my options, and the company was purchased later the same year and my common shares were purchased for $0 (preferred shares took all the money, leaving common with zero), how do I file this loss?

I'm by no means an expert, but I believe you should ask for a 1099B with proceeds at $0 and cost-basis at either $0 and marked as not reported, or with cost-basis equal to your expense. If the former is the case (not reported), you report the cost-basis yourself.

Thanks for the info!

Re: Filing Taxes After Exercising Start Up Options

#47

Post by mbesto » Wed, Feb 22, 2017, 7:11 PM UTC

charliepark wrote: post #42

mbesto wrote: post #37

Earlier quoted context omitted.

This also requires that you have the money to pay for it at that moment too right? In other words - I get 10k options at $1 strike price, in order to exercise within 30 days I need to pay $10,000. Correct?

You'll need $10K to buy the options from your company. That's "Day 1". By Day 30 you need to file 83b with the IRS. And when it's time to pay your taxes for that year, you'll need to pay the IRS the taxes on the "income" you got from exercising the options. That is, if the strike price is $1 and the current market price for the shares is $3, the IRS sees that as a $20K income you made (even though you don't actually…

So this can totally screw you if:

Day 0 - Company is worth $1B (pay $10k)

Day 365 - Company is worth $2B (pay taxes on $10k in "income")

Day 900 - Company sells for $50M (your stock is probably worthless due to liquidation preferences)

Re: Filing Taxes After Exercising Start Up Options

#48

Post by abalone » Wed, Feb 22, 2017, 10:33 PM UTC

hkmurakami wrote: post #19

harryh wrote: post #12

Earlier quoted context omitted.

Yes, this is true. I will add that I have found that if you ask hard enough there is a good chance that companies that say that they don't do this at first will end up allowing you to do so. There's really no good reason for them not to.

There is one "good reason". To hand cuff and trap employees. I hope that the incidence rate for this is low, but it must be non zero. (I think pre series A companies should give out RSUs and not options to avoid these situations)

There actually are other non-nefarious reasons. When employees exercise they become shareholders, and certain securities law regulations come into effect. A young startup might want to defer those until they are big enough to handle the administrative overhead.

Also, while it's a tremendous tax benefit and pretty much a no-brainer to early employees, once the strike price constitutes an investment of tens of thousands of dollars, all of which could be lost, it's not necessarily a popular or prudent choice for later employees. So then it becomes this thing that only the early employees get, which perhaps might lead to some resentment and morale issues. Just some issues for companies to consider.

Good overview of the pros and cons here: http://www.startupcompanylawyer.com/2009/01/11/should-a-comp...

Re: Filing Taxes After Exercising Start Up Options

#49

Post by jjirsa » Thu, Feb 23, 2017, 6:56 AM UTC

argigg wrote: post #14

harryh wrote: post #7

Semi related to this blog post: A lot of people don't realize that you can exercise ISOs before they vest. If you are sure that you are going to be exercising your options there is no reason to wait until they vest and, in fact, there are disadvantages to doing so. As soon as you get your options (within 30 days. there is a time limit.) you tell your company you want to exercise then and file and 83B with the IRS ind…

To state the obvious, the downside of early exercise is you might lose that money if the company does poorly.

The downside of early exercise is if you leave before vested and your employer repurchases the shares, you're out the taxes you paid (minus some deductions in future years that will offset other gains but will still be painful for most people).

Re: Filing Taxes After Exercising Start Up Options

#50

Post by argigg » Fri, Feb 24, 2017, 6:07 AM UTC

jjirsa wrote: post #49

argigg wrote: post #14

Earlier quoted context omitted.

To state the obvious, the downside of early exercise is you might lose that money if the company does poorly.

The downside of early exercise is if you leave before vested and your employer repurchases the shares, you're out the taxes you paid (minus some deductions in future years that will offset other gains but will still be painful for most people).

When you early exercise, don't you pay the 409a price? Why would you owe taxes at the time of exercise?