House Passes Employee Stock Options Bill Aimed at Startups • Hacker News Board

Re: House Passes Employee Stock Options Bill Aimed at Startups

#91

Post by aqme28 » Fri, Sep 23, 2016, 3:40 PM UTC

Eridrus wrote: post #85

calcsam wrote: post #82

This is amazing news. Some context: It's quite common to owe taxes today for gains on the value of your stock -- which is an illiquid asset you can't sell. This puts employees in the position of shelling out cash to keep something that rightfully belongs to them, or simply abandoning it (failing to exercise) when they leave the company. This bill would defer taxes on gains up to 7 years, or until the company goes pub…

> For example: one early engineer at Zenefits had to pay $100,000 in taxes for exercising his stock....and then all the crap hit the fan, and he likely paid more in taxes than his shares will end up being worth. Ouch. Would this bill actually help this scenario? I'm unclear if deferring the tax liability just means that you pay the same amount of tax later, or if you can write off capital losses like this at the time…

This bill reduces the main reason that employees exercise their options "early" while they're still illiquid. The employee likely wouldn't have paid that money until there was an actual liquidity event.

Re: House Passes Employee Stock Options Bill Aimed at Startups

#92

Post by __jal » Fri, Sep 23, 2016, 3:40 PM UTC

matt_wulfeck wrote: post #57

> Only startups offering stock options to at least 80 percent of their workforce would be eligible for tax deferrals, and a company’s highest-paid executives would not be able to defer taxes on their stock under the legislation. I understand the desire to avoid a regressive taxation system, but why is it that every tax rule we create comes with 2x the amount of caveats and rules? Our tax system is becoming a mess. At…

> At this rate soon nobody will be able to file their own taxes without an accountant to sort through the muck. And complicated to systems tend to benefit the wealthy.

It also heavily benefits Quicken. Along with HR Block, they heavily lobby against any effort that simplifies the tax code. Capitalism, American-style.

Re: House Passes Employee Stock Options Bill Aimed at Startups

#93

Post by bjt » Fri, Sep 23, 2016, 3:43 PM UTC

maratd wrote: post #89

hx87 wrote: post #78

Earlier quoted context omitted.

A complicated tax system is perfectly fine if its control logic is algorithmic and its parameters are easily found by the taxpayer. That's already somewhat true, since tax law is written by lawyers and accounts, who make excellent programmers if given appropriate training. Unfortunately, for me at least, legal English is 1000x harder to parse and understand than any nonesoteric programming language.

> A complicated tax system is perfectly fine if its control logic is algorithmic and its parameters are easily found by the taxpayer. Expecting a normal human being to navigate anything complex in unreasonable. Complex is a relative term. By definition, if something is complex, it is difficult for an average person to navigate. I know where you're going with this, if something is consistently coherent we can use comp…

> But ... there's no reason we can't have a simple tax system. None at all.

Most quirks and exceptions in our current system have their own constituencies who are willing to send lobbyists to defend the status quo. Those constituencies represent the thousands of reasons why we can't have a simple system. There is no comparably powerful constituency for making taxes simpler. Most people just don't care that much.

Re: House Passes Employee Stock Options Bill Aimed at Startups

#94

Post by harryh » Fri, Sep 23, 2016, 3:44 PM UTC

aqme28 wrote: post #91

Eridrus wrote: post #85

Earlier quoted context omitted.

> For example: one early engineer at Zenefits had to pay $100,000 in taxes for exercising his stock....and then all the crap hit the fan, and he likely paid more in taxes than his shares will end up being worth. Ouch. Would this bill actually help this scenario? I'm unclear if deferring the tax liability just means that you pay the same amount of tax later, or if you can write off capital losses like this at the time…

This bill reduces the main reason that employees exercise their options "early" while they're still illiquid. The employee likely wouldn't have paid that money until there was an actual liquidity event.

This is not correct. The main reason that employees exercise options "early" is if they change jobs and have to exercise to keep their options.

Re: House Passes Employee Stock Options Bill Aimed at Startups

#95

Post by iaw » Fri, Sep 23, 2016, 3:48 PM UTC

matt_wulfeck wrote: post #57

> Only startups offering stock options to at least 80 percent of their workforce would be eligible for tax deferrals, and a company’s highest-paid executives would not be able to defer taxes on their stock under the legislation. I understand the desire to avoid a regressive taxation system, but why is it that every tax rule we create comes with 2x the amount of caveats and rules? Our tax system is becoming a mess. At…

I agree that there's too much added complexity in the tax-code but do you really feel that this requirement is that onerous?

The likely motivation being being in line with those around 401k account requirements: if a company uses this, it should be to the benefits of the employees and not just the executive staff.

Re: House Passes Employee Stock Options Bill Aimed at Startups

#96

Post by brianwawok » Fri, Sep 23, 2016, 3:49 PM UTC

MichaelBurge wrote: post #77

harryh wrote: post #72

Earlier quoted context omitted.

As a general rule, you could remove any government agency created with the increase in wartime tax revenue after the war is over. That should get you back to the pre-war tax rate. Pre war federal spending was ~10% of GDP. Currently we're at about 25%. So you want to cut federal spending by about 60%. Medicare is about 15% of the fed budget. Social Security is about 25%. That's the 40% you get to keep right there. You…

I would cut Medicare and Social Security entirely.

Okay so what happens to the 30 million people that literally have nothing else to live on? 65 years old, no savings, failing health.

Round them up and shoot them I guess?

Re: House Passes Employee Stock Options Bill Aimed at Startups

#97

Post by brianwawok » Fri, Sep 23, 2016, 3:51 PM UTC

tomjen3 wrote: post #71

brianwawok wrote: post #47

Earlier quoted context omitted.

So you cap income tax at 2%. Congratulations you just tripled property tax and made sales tax 20%. Taxes are like wackamole. You can't just limit 1 tiny piece and expect anything to change. Furthermore you can't just lower the total take unless you want to explain where the cut is coming from. Less school funding? Less roads? Less police? Less Army? More debt?

It would be better if the income tax was zero and we had a higher tax on consumption (allow a base deduction for poor people if you want) since what you tax you get less of, and we don't want less investment in human capital or physical capital, but less consumption is okay (though obviously still undesirable). As for the rest, just cut all subsidies to companies and farms, as a start. Then cut the military down to w…

Cutting all farm subsidies would be risky.

Our food import rate would climb due to the strength of the dollar. Which is fine for the short term. If bad things happen in 20 years and we can't even grow enough good to feed the country? That seems pretty bad.

Re: House Passes Employee Stock Options Bill Aimed at Startups

#98

Post by edoceo » Fri, Sep 23, 2016, 3:51 PM UTC

iaw wrote: post #95

matt_wulfeck wrote: post #57

> Only startups offering stock options to at least 80 percent of their workforce would be eligible for tax deferrals, and a company’s highest-paid executives would not be able to defer taxes on their stock under the legislation. I understand the desire to avoid a regressive taxation system, but why is it that every tax rule we create comes with 2x the amount of caveats and rules? Our tax system is becoming a mess. At…

I agree that there's too much added complexity in the tax-code but do you really feel that this requirement is that onerous? The likely motivation being being in line with those around 401k account requirements: if a company uses this, it should be to the benefits of the employees and not just the executive staff.

It's complicated but this one rule is OK.

Repeat * 100000 = Mess!

Re: House Passes Employee Stock Options Bill Aimed at Startups

#99

Post by MichaelBurge » Fri, Sep 23, 2016, 3:57 PM UTC

brianwawok wrote: post #96

MichaelBurge wrote: post #77

Earlier quoted context omitted.

I would cut Medicare and Social Security entirely.

Okay so what happens to the 30 million people that literally have nothing else to live on? 65 years old, no savings, failing health. Round them up and shoot them I guess?

It may help to think of the suggestion as more a "We never should've passed it in the first place" rather than a suggestion to immediately propose a bill of repeal.

I have some thoughts on how to conduct an orderly shutdown of the programs over, say, 30 years, but they would take the thread too far away from the subject of stock options.

Re: House Passes Employee Stock Options Bill Aimed at Startups

#100

Post by grellas » Fri, Sep 23, 2016, 4:02 PM UTC

The original point of ISOs was to offer to employees the opportunity to take an economic risk with stock options (by exercising and paying for the stock at the bargain price) while avoiding the tax risk (by generally not recognizing ordinary income from that exercise and being taxed only at the time the stock was sold, and then only as a capital gains tax).

AMT has since emerged to devour the value of this benefit. By having to include the value of the spread (difference between exercise price and fair market value of the stock on date of exercise) as AMT income and pay tax on it at 28%-type rates, an employee can incur great tax risk in exercising options - especially for a venture that is in advanced rounds of funding but for which there is still no public market for trading of the shares. Even secondary markets for closely held stock are much restricted given the restrictions on transfer routinely written into the stock option documentation these days.

So why not just pass a law saying that the value of the spread is exempt from AMT? Of course, that would do exactly what is needed.

The problem is that AMT, which began in the late 60s as a "millionaire's tax", has since grown to be an integral part of how the federal government finances its affairs and is thus, in its perverse sort of way, a sacred cow untouchable without seriously disturbing the current political balance that is extant today.

And so this half-measure that helps a bit, not by eliminating the tax risk but only by deferring it and also for only some but not all potentially affected employees.

So, if you incur a several hundred thousand dollar tax hit because you choose to exercise your options under this measure, and then your venture goes bust for some reason, it appears you still will have to pay the tax down the road - thus, tax disasters are still possible with this measure. Of course, in optimum cases (and likely even in most cases), employees can benefit from this measure because they don't have to pay tax up front but only after enough time lapses by which they can realize the economic value of the stock.

This "tax breather" is a positive step and will make this helpful for a great many people. Not a complete answer but perhaps the best the politicians can do in today's political climate. It would be good if it passes.

Edit: text of the bill is here: https://www.congress.gov/bill/114th-congress/house-bill/5719... (Note: it is a deferral only - if the value evaporates, you still owe the tax).