4 ms·

Wouldn't the prudent thing to do be to sell at least enough stock to pay the tax? If not allowed to sell at that point- just short stock to have the equivalent

Wouldn't the prudent thing to do be to sell at least enough stock to pay the tax? If not allowed to sell at that point- just short stock to have the equivalent effect (minus fees)? Something else I've never understood to be rational - If you wouldn't buy $10 in yahoo stock- why would you hold it because you have it? My uninformed but seems logical answer would be sell the stock you got, pay the tax and buy and index fund.

stepanhruda 10y ago
The stock needs to be public by the time you exercise to be able to do this.
- trimbo 10y ago
  When Yahoo bought Geocities, both were public.
xxbondsxx 10y ago
> Wouldn't the prudent thing to do be to sell at least enough stock to pay the tax? It's not liquid yet, that's the issue. That's what is nice about most RSU plans -- they immediately sell to cover, so you don't receive a ton of stock with an attached tax bill. But illiquid options are different; the capital gains tax is for the paper-wealth you just received. That same paper wealth can evaporate, but the tax bill remains.
- tuna-piano 10y ago
  So you have an asset that is considered worth a price, but you cannot buy it or sell it at that price? Seems to me an unfortunate tax policy.
  - demonshalo 10y ago
    almost all tax policies are unfortunate.
    - lostlogin 10y ago
      .. Although it is handy to have had an education, healthcare, police service, fire service, roads, libraries etc. But other than that stuff, it's very unfortunate.
      - gvb 10y ago
        The OP said due to tax policy, not taxes. Due to perverse incentives (pandering to various classes of voters) and unintended consequences, tax policies have become byzantine horrors.
        Bartweiss 10y ago
        Very broadly, it seems like tax policy fails to cope (pleasantly) with anything other than totally standard earnings. If you earn a steady wage, or simple capital gains, things go fine. Anyone dealing in options, variable hours, contract work, or anything else unconventional faces totally irrational outcomes unless they're exceedingly careful.
      - Bartweiss 10y ago
        That's about taxation, not tax policy. How much money you need to collect and how you collect it are two very different beasts. Virtually any unconventional earnings have the potential to screw you based on the intricacies of law, rather than the average tax rate employed.
  - jonathankoren 10y ago
    It's the exercise and hold that gets you. If you do a same day sell, you have the money to cover the taxes immediately, since you sold. If you exercise and hold, you pay the money to exercise, and now owe taxes on the asset at fair market value of the assets when exercised, which you might not have because your bank account is actually decreasing. In the future, if the asset loses value, even if you sold all of it, you may still be left with a tax bill you can literally never repay.
    - infinite8s 10y ago
      Except you can't sell if the company is still private.
      - jonathankoren 10y ago
        That's not true. The market it very illiquid, but you can sell it. Sharespost is one place.
ng12 10y ago
The prudent thing is to only do cash-positive transactions, but that's easier said than done when the majority of your net worth is tied to your company. Good Technologies is a good example -- any employee who purchased NSOs while they were still private got shafted: http://www.businessinsider.com/long-weird-history-of-good-technology-2015-12 http://www.businessinsider.com/long-weird-history-of-good-te...
ghaff 10y ago
You're right but remember that this was happening during a period when it was really hard to not get sucked into the "irrational exuberance" with Yahoo being as much of a poster child as anyone. I got burned in this way with my company's options but fortunately only a modest amount that I exercised and held. I had a fair number of total shared but fortunately they recovered somewhat over time and have been a good source of capital gains offsets in any case :-)

stepanhruda 10y ago

The stock needs to be public by the time you exercise to be able to do this.

trimbo 10y ago
When Yahoo bought Geocities, both were public.

xxbondsxx 10y ago

> Wouldn't the prudent thing to do be to sell at least enough stock to pay the tax? It's not liquid yet, that's the issue. That's what is nice about most RSU plans -- they immediately sell to cover, so you don't receive a ton of stock with an attached tax bill. But illiquid options are different; the capital gains tax is for the paper-wealth you just received. That same paper wealth can evaporate, but the tax bill remains.

tuna-piano 10y ago
So you have an asset that is considered worth a price, but you cannot buy it or sell it at that price? Seems to me an unfortunate tax policy.
- demonshalo 10y ago
  almost all tax policies are unfortunate.
  - lostlogin 10y ago
    .. Although it is handy to have had an education, healthcare, police service, fire service, roads, libraries etc. But other than that stuff, it's very unfortunate.
    - gvb 10y ago
      The OP said due to tax policy, not taxes. Due to perverse incentives (pandering to various classes of voters) and unintended consequences, tax policies have become byzantine horrors.
      - Bartweiss 10y ago
        Very broadly, it seems like tax policy fails to cope (pleasantly) with anything other than totally standard earnings. If you earn a steady wage, or simple capital gains, things go fine. Anyone dealing in options, variable hours, contract work, or anything else unconventional faces totally irrational outcomes unless they're exceedingly careful.
    - Bartweiss 10y ago
      That's about taxation, not tax policy. How much money you need to collect and how you collect it are two very different beasts. Virtually any unconventional earnings have the potential to screw you based on the intricacies of law, rather than the average tax rate employed.
- jonathankoren 10y ago
  It's the exercise and hold that gets you. If you do a same day sell, you have the money to cover the taxes immediately, since you sold. If you exercise and hold, you pay the money to exercise, and now owe taxes on the asset at fair market value of the assets when exercised, which you might not have because your bank account is actually decreasing. In the future, if the asset loses value, even if you sold all of it, you may still be left with a tax bill you can literally never repay.
  - infinite8s 10y ago
    Except you can't sell if the company is still private.
    - jonathankoren 10y ago
      That's not true. The market it very illiquid, but you can sell it. Sharespost is one place.

ng12 10y ago

The prudent thing is to only do cash-positive transactions, but that's easier said than done when the majority of your net worth is tied to your company. Good Technologies is a good example -- any employee who purchased NSOs while they were still private got shafted: http://www.businessinsider.com/long-weird-history-of-good-technology-2015-12 http://www.businessinsider.com/long-weird-history-of-good-te...

ghaff 10y ago

You're right but remember that this was happening during a period when it was really hard to not get sucked into the "irrational exuberance" with Yahoo being as much of a poster child as anyone. I got burned in this way with my company's options but fortunately only a modest amount that I exercised and held. I had a fair number of total shared but fortunately they recovered somewhat over time and have been a good source of capital gains offsets in any case :-)