4 ms·

If you exercise stock options, you get taxed on the difference between the strike price and the market value at the time you exercise, as normal income (not cap

If you exercise stock options, you get taxed on the difference between the strike price and the market value at the time you exercise, as normal income (not capital gains). This can be a big problem if you exercise stock options, then the price of the stock drops. You might not be able to sell the stock for enough to pay the taxes you owe, and although you can take a capital loss, you can't use capital losses to offset normal income (beyond a fairly small limit each year).

TheCoelacanth 10y ago
The same is true if you are given actual stock. You owe taxes when it vests (or hypothetically when you are given it if it is unrestricted stock) not when you sell it.
- morgante 10y ago
  This can be avoided with an 83b election.
- SeoxyS 10y ago
  You can file an 83b election with the IRS to avoid this problem, thankfully.
  - TheCoelacanth 10y ago
    That just moves the point where you have to lay out money to even earlier. That's great if it's an early stage startup where the shares are worth practically nothing, but it's even worse if they are already worth a lot.
    - SeoxyS 10y ago
      Oh sure; but you won't have to lay down any money until you sell your stock; and paying taxes on real money is a lot easier than paying taxes on imaginary money.
jacobwcarlson 10y ago
That's only true for NQ options. With ISO options you aren't taxed until you actually sell the shares they covert to, and then as a capital gain tax, not as ordinary income.
- bjacokes 10y ago
  That's not true, the ISO option spread at exercise is taxed via AMT [1]. In general you shouldn't give out tax advice, and if you do at least make sure you have your facts straight. Plenty of early employees have been bitten by this rule and it doesn't that people perpetuate incorrect information. [1] https://www.nceo.org/articles/stock-options-alternative-minimum-tax-amt https://www.nceo.org/articles/stock-options-alternative-mini...
- SeoxyS 10y ago
  That's only true when the value of your options is pretty small. ISOs are taxed under the AMT plan as regular income at a rate of 26-28%, and so you might be forced to pay taxes on them anyways. Source: I had a fat AMT tax bill precisely because of this. :/
ianferrel 10y ago
I should have said that the above is not always the case, but it can be the case. Talk to a tax attorney.

TheCoelacanth 10y ago

The same is true if you are given actual stock. You owe taxes when it vests (or hypothetically when you are given it if it is unrestricted stock) not when you sell it.

morgante 10y ago
This can be avoided with an 83b election.
SeoxyS 10y ago
You can file an 83b election with the IRS to avoid this problem, thankfully.
- TheCoelacanth 10y ago
  That just moves the point where you have to lay out money to even earlier. That's great if it's an early stage startup where the shares are worth practically nothing, but it's even worse if they are already worth a lot.
  - SeoxyS 10y ago
    Oh sure; but you won't have to lay down any money until you sell your stock; and paying taxes on real money is a lot easier than paying taxes on imaginary money.

jacobwcarlson 10y ago

That's only true for NQ options. With ISO options you aren't taxed until you actually sell the shares they covert to, and then as a capital gain tax, not as ordinary income.

bjacokes 10y ago
That's not true, the ISO option spread at exercise is taxed via AMT [1]. In general you shouldn't give out tax advice, and if you do at least make sure you have your facts straight. Plenty of early employees have been bitten by this rule and it doesn't that people perpetuate incorrect information. [1] https://www.nceo.org/articles/stock-options-alternative-minimum-tax-amt https://www.nceo.org/articles/stock-options-alternative-mini...
SeoxyS 10y ago
That's only true when the value of your options is pretty small. ISOs are taxed under the AMT plan as regular income at a rate of 26-28%, and so you might be forced to pay taxes on them anyways. Source: I had a fat AMT tax bill precisely because of this. :/

ianferrel 10y ago

I should have said that the above is not always the case, but it can be the case. Talk to a tax attorney.