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Yeah, the ISO spread with the AMT is bullshit that basically keeps the plebes in their place by not actually letting them get any windfall. However it seems lik
by jonathankoren 10y ago
Yeah, the ISO spread with the AMT is bullshit that basically keeps the plebes in their place by not actually letting them get any windfall. However it seems like the real problem is exercising post-IPO. In the post-IPO world, you're dealing with say a 5x to 10x spread, possibly even more. In the pre-IPO world, your spread is probably 2x at most, which is much more manageable.
One clarification with what you said, is that with the AMT ISO exercise is that you're not actually taxed on both the exercise and the sell. What's actually going on is that you're prepaying your taxes when you sell the stock. When you sell the shares, you'll only have to pay the taxes (either regular income or capital gains) based on the difference of the fair market value of the stock when exercised and when sold. If it went up, and you sold in less than year from exercise or less than 2 years from ISO grant, then it's regular income, otherwise it's capital gains. So you could actually get a tax refund when you sell. (Same is true if the market price actually declined between exercise and sell.)
The argument is that when you exercise, you received something of value for less than market and so you made money, but in reality you actually haven't realized any gains, and actually are at cash loss. I understand the argument, but I don't agree with it, because you did not actually realize any gain.
FWIW, San Jose's congresswoman Zoe Lofgren has repeatedly tried to fix the AMT and ISO taxation, but hasn't had much success.[0]
Where I disagree with you is thinking that private companies are going to "figure out a way to make this work" in a way that's beneficial for workers. I'm sorry, but I've never seen high finance work out for workers. It's basically a play for the financially desperate. It's no better than selling you shares on sharespost or something. If it's illiquid market, you're never going to get full value, and you know damn well those that are buying are going to expect a few multiples in gain. They can just wait a bit longer. Workers on the other hand, are busy trying to scrape together a down payment on a $2,000,000 shack in the valley.
[0] https://lofgren.house.gov/news/documentsingle.aspx?DocumentID=365511 https://lofgren.house.gov/news/documentsingle.aspx?DocumentI...
- fossuser 10y agoThanks for the clarification about post exercise selling of shares (that you're taxed on the difference between exercise price and sale price). I agree the argument that you make money on exercise doesn't make sense - especially since the company could easily crash afterwards and you can still get stuck with a huge tax bill for value you never actually realized (except on paper). Agreed you won't get full value, but I think the existence of liquidity events like this one is an example of private companies "figuring out a way to make this work". They're letting employees realize some value from their equity. Nothing can be done about the 2 million dollar shack in the valley though (unfortunately). One other option sometimes available that I didn't mention is filing an 83b election with the IRS and exercising options early before they've vested and before there's a fair market spread. You can avoid taxes this way, but you're putting money at risk very early and often you're not able to do this anyway (there are rules about early exercise).
- jonathankoren 10y agoOne of the problems with an 83b is that your company might not allow early exercise.
- trungonnews 10y agoWhat happen if the company goes bankrupt? What happen to the prepaid taxes on the ISO spread?
- harryh 10y agoYou get a credit that you can use to offset your taxes in future years.
- trungonnews 10y agoIs it a capital gain credit? One with $3000/year deduction cap? If so, it can take a couple life times to fully redeem the prepaid tax credit.
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- harryh 10y agoYes it's a capital loss. Which means you can use it to offset an unlimited amount of capital gains, but only 3k of ordinary income. So how long it takes to redeem could be a long time if you never incur capital gains.
- encoderer 10y agoI don't care to nit pick but it's not quite that simple. The AMT credit you receive at exercise can in theory be used to offset the tax due at sale, but you can only claim amt credit if your traditional tax liability is higher than your amt liability that year. While that may be true if you sell a lot of stock it's not a lock esp in California where a working married couple with a home can have a lot of high dollar deductions. In that case you keep the credits until you can use them.
- spacecowboy_lon 10y agoAmen I remember that when I had shares in o2 from a employee scheme. The company did an exercise in buying out small shareholders for around 50p - Less than a year later the sahres got brought by telephonica for £2.0
- lmm 10y agoThe notion of "realizing" seems like nonsense to me. You get given a piece of paper worth $100, you should get taxed for $100. Whether that piece of paper is a federal reserve note or a stock certificate should be an irrelevance, no?
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- chrisbennet 10y agoCan you buy anything with that piece of paper? Can you sell it? If not, it's not really "worth" $100. That's the difference.
- jonathankoren 10y agoI have $1. I buy something for $1 that's worth $100 dollars. I now have zero dollars. I now owe $37 in taxes. I have $-37.