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UK resident here: why were employees paying tax on the nominal value of the shares? Is it not possible to structure the compensation so that tax is payable when

UK resident here: why were employees paying tax on the nominal value of the shares? Is it not possible to structure the compensation so that tax is payable when the shares are sold (capital gains) or on any dividends paid on the shares?

dikaiosune 11y ago
There's tax due on incentive stock options (ISOs, I think I have the name right?) when you exercise the option. So, if my layman understanding is correct, you get an offer to pay a discounted price on company stock whenever you want (usually based somewhat on valuation when you're hired). Then, the company's valuation increases (all on paper and in private, not public market price corrections, just whatever investors think is "fair"), and you exercise your stock option. The difference between the price you paid (your option price) and the value of the share (as determined by the private valuation) is now taxable income in the eyes of the IRS. You will owe taxes on stocks that might still end up being worthless, and your employer also has the power to prevent you from selling them before they go public/are bought out.
ryan-c 11y ago
> Why were employees paying tax on the nominal value of the shares? Alternative minimum tax, created in 1969 to target 155 high-income households who were using too many tax loopholes. It was not adjusted for inflation, and it did not anticipate rank-and-file employees receiving stock options. > Is it not possible to structure the compensation so that tax is payable when the shares are sold (capital gains) or on any dividends paid on the shares? Yes, but this requires the employee to pre-pay for the shares when they are issued. Normal tax rules do not consider exercising options to be a taxable event, but AMT rules do. You can exercise options resulting in modest paper gains without them being taxed.
thetrb 11y ago
I'm not an expert on this, but when you exercise stock options you have to pay taxes on the fair market value at that time. In some cases it might make sense to exercise stock options before you can actually sell them (e.g. if you expect the price to keep going up to save on taxes or if you're leaving the company when you typically only have a limited amount of time to exercise or lose those options). So in these cases you now own the stock and paid taxes on it, but if the stock price falls drastically after that you might have actually paid more taxes than the stock is worth now.

dikaiosune 11y ago

There's tax due on incentive stock options (ISOs, I think I have the name right?) when you exercise the option. So, if my layman understanding is correct, you get an offer to pay a discounted price on company stock whenever you want (usually based somewhat on valuation when you're hired). Then, the company's valuation increases (all on paper and in private, not public market price corrections, just whatever investors think is "fair"), and you exercise your stock option. The difference between the price you paid (your option price) and the value of the share (as determined by the private valuation) is now taxable income in the eyes of the IRS. You will owe taxes on stocks that might still end up being worthless, and your employer also has the power to prevent you from selling them before they go public/are bought out.

ryan-c 11y ago

> Why were employees paying tax on the nominal value of the shares? Alternative minimum tax, created in 1969 to target 155 high-income households who were using too many tax loopholes. It was not adjusted for inflation, and it did not anticipate rank-and-file employees receiving stock options. > Is it not possible to structure the compensation so that tax is payable when the shares are sold (capital gains) or on any dividends paid on the shares? Yes, but this requires the employee to pre-pay for the shares when they are issued. Normal tax rules do not consider exercising options to be a taxable event, but AMT rules do. You can exercise options resulting in modest paper gains without them being taxed.

thetrb 11y ago

I'm not an expert on this, but when you exercise stock options you have to pay taxes on the fair market value at that time. In some cases it might make sense to exercise stock options before you can actually sell them (e.g. if you expect the price to keep going up to save on taxes or if you're leaving the company when you typically only have a limited amount of time to exercise or lose those options). So in these cases you now own the stock and paid taxes on it, but if the stock price falls drastically after that you might have actually paid more taxes than the stock is worth now.