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House Passes Employee Stock Options Bill Aimed at Startups

347 points by endswapper 10y ago

martin_ 10y ago
This sounds great, though requiring "offering 80% of the workforce stock" and excluding highest paid executives seems vague - is this at time of hiring, when stock is issued, fully vested, when taxes are due, somewhere inbetween? I parted ways with a startup in the valley last year and exercised some shares on January 13th. If I had exercised just two weeks earlier, I'm told I would've been hit with north of 50k in AMT, I have until next year to figure it out now but I wonder if I'm eligible. Also curious how long it typically takes to get from house, through the senate and passed.
- breerly 10y ago
  Sounds like it's 80% of employees must have been offered stock in the year you began employment. My guess is that this applies in most common cases, although I wonder what the situation they were trying to guard from was...
  - emidln 10y ago
    Would this be the case if your options have a 1 year cliff?
    - mfringel 10y ago
      Sounds like it. It's about "time of grant" as opposed to "time to vesting".
- tetrep 10y ago
  From the bill, a corporation qualifies (aka the current state of affairs) if... such corporation has a written plan under which, in such calendar year, not less than 80 percent of all employees who provide services to such corporation in the United States (or any possession of the United States) are granted stock options, or restricted stock units, with the same rights and privileges to receive qualified stock.
  - martin_ 10y ago
    So there's no way it could be retroactively applied, then. Bummer!
chillydawg 10y ago
Nice to see tax laws for the rich can get passed, but substantive change to do with criminal justice, healthcare etc go nowhere.
- breerly 10y ago
  This bill simply defers the taxes till actual gains are realized, instead of requiring them when options are exercised. Ideally, this means more employees can actually act on their options, instead of just "the rich" as you imply.
  - ones_and_zeros 10y ago
    The argument could be made that this is actually a gift to businesses and executives. Ultimately this bill makes working at a startup more attractive when they are already a pretty poor choice, so we'll just have more people making poor choices and putting themselves at financial risk to the benefit of their employer.
    - gshulegaard 10y ago
      While this is certainly an argument, I think the bill fixes an unintended interaction in tax law where people were getting taxed for "realized gains" that actually weren't realized...or gains at all (yet). So an alternative way of looking at it is that this bill removes an _accidental_ disincentive for innovation.
    - breerly 10y ago
      This makes it so employees can actually participate in the upside of the risk - something that the current tax setup can make impossible for employees of highly valued private companies. --- I'm Bob, I write a check for $50K to exercise my stock options. They might be worth something some day, I'm taking that risk and working my ass off to see that they are. The year I exercise the options, the gov sees that I've made a $1.5M "paper gain", and they want their taxes. Call it $300K. If Bob doesn't have $350K in the bank, he is stuck - he basically needs to wait until said company goes public to make a zero-cash sale, or forfeit his options when leaving (either by quitting or getting fired). Not to mention if Bob exercised the stock and payed the $350K - the company could never IPO, or it could and tank. Bob wouldn't see any of that money back. Bob's upside for working at said risky startup is severally limited. This is a surprise to most employees, who accepted the risk and assumed they would be able to participate in the upside of the startup (kind of the whole point). These employees find out that, in many cases, they can't actually become shareholders, or they do and lose everything. In concept, this bill would have Bob write the $50K check for the options, and then only pay taxes once and if actual liquid gains were realized. How does this only affect the rich or somehow incorrectly incentive people to work for startups? I'm happy for Bob.
adanto6840 10y ago
The bill text is here and is pretty easy to decipher: https://www.congress.gov/bill/114th-congress/house-bill/5719 https://www.congress.gov/bill/114th-congress/house-bill/5719
- harryh 10y ago
  Why all the goofy eligibility rules? Just get rid of the rule where exercising stock options counts as income under the AMT(1). It's line 14 in Part 1 of Form 6251. Just get rid of it! When people talk about our tax system being too complicated bills like this are why. 1. For that matter we should get rid of the AMT entirely. The fact that we have 2 separate tax systems for individuals is insane. That's a bigger story though.
  - rayiner 10y ago
    We have 52 different tax systems for individuals by my count. All the states have have different rules too. Last several years, my wife and I have had to figure out our taxes five different ways on the same income.
    - MichaelBurge 10y ago
      Does Washington D.C. make a 53rd? And though income taxes are managed by the state, I suppose each county collects its own property taxes.
      - rayiner 10y ago
        Yup, 53. Or maybe 44 if you don't count the state that don't tax ordinary income.
      - maxerickson 10y ago
        Many jurisdictions smaller than states levy income taxes. I think they are usually simpler to figure (often just a single flat rate).
asah 10y ago
Can someone explain: if you exercise and hold the shares (eg leave the company) do you owe tax after year seven, even if the shares remain illiquid? That's the core issue: the IRS is taxing individuals on truly illiquid assets.
- jimbokun 10y ago
  True, but is it the IRS' fault if the corporation refuses to create a market for their shares? If the IRS didn't tax these shares, it would quickly become a tax shelter of epic proportions, no?
  - deleted 10y ago
    [deleted]
  - Zigurd 10y ago
    A key factor in whether that's truly a tax shelter is control. If your not in a position to make or even influence decisions about liquidity, you're not exactly a voluntary participant.
    - asah 10y ago
      exactly.
  - sk5t 10y ago
    What's the benefit of a wholly illiquid "shelter"?
    - hacknat 10y ago
      That it will become liquid one day. If you get to make all sorts of incredible options deals under the cover of "not in the market" then you can simply make lots of situations like this happen and simply bring them to market when there is no risk involved for you anymore.
      - 10y ago
jnordwick 10y ago
Most employees get hit by the AMT and the step up in basis when exercising their incentive employee stock options, and from just skimming the bill, I don't see how that is prevented.
- breerly 10y ago
  I was looking for that language as well - I expected to see that "gains" from exercising options do not count towards AMT, and that related taxes are completely deferred until the time when the investment becomes liquid (or 7 years?).
- stustein 10y ago
  If the income is deferred, I would imagine that it wouldn't apply to AMT calculations. It'd be nice for that language to be explicit though. Regardless, the Obama Administration "strongly opposes" the bill in its current form since it would "increase the Federal deficit by $1 billion over the next 10 years." https://www.whitehouse.gov/sites/default/files/omb/legislative/sap/114/saphr5719r_20160920.pdf https://www.whitehouse.gov/sites/default/files/omb/legislati... I wonder how often bills with this "strong opposition" still end up getting passed anyway.
  - dwaltrip 10y ago
    The federal budget was $3.8 trillion (with a "t") last year, and the deficit was $438 billion. Increasing the annual deficit by $100 million[1], or 0.02%, seems like a non-issue. [1] $1 billion over 10 years is $100 million per year.
    - stustein 10y ago
      Agreed — it's a pretty weak reason to "strongly oppose" a bill, which is why I'm wondering how likely it would be for the Administration to change their position. Like, what percentage of the time do they issue a statement in strong opposition but then end up passing the bill anyway?
  - harryh 10y ago
mrfusion 10y ago
Does anyone have experience buying stock options from employees. I really want to own shares in a few companies that would never hire me :-(
- Eridrus 10y ago
  Companies have the right of first refusal and don't like lots of unrelated people on their cap table who only hold a small amount of shares, so don't expect this to work out
  - JoshTriplett 10y ago
    Apart from adding complexity to future funding rounds, companies don't like having many different owners of shares because there's an upper bound on number of distinct stockholders above which you're considered a "public" company and have a pile of additional obligations.
- chubot 10y ago
  I would check out sharespost, equityzen, or equidate (and also search for them on Hacker News, as I found others mention experience with sharespost). I don't have direct experience, but I was helping a friend with a number of shares in a late stage startup research the sell side, and those are the companies that came up. It crossed my mind to buy shares but I haven't done so. For some of them, you have to be an accredited investor, which means a certain net worth/income threshold to be met. (I think the SEC is trying to prevent naive investors from getting fleeced in this "dark" market). SharesPost seems to have a fund that gets you exposure to a lot of late stage startups. AngelList apparently has a fund for early stage startups... if anyone knows anything about that I would appreciate any feedback. EDIT with more info: From my research, buying from every company is different. That is why companies like SharesPost exist. And you really should have the permission of the company to do the transaction. I think it may be possible to do it without their permission, but that's beyond my knowledge. There should be employees willing to go through this effort because they stand to benefit because you are offsetting their tax risk.
  - deleted 10y ago
ap22213 10y ago
What the house needs to do is regulate startup's shady options agreements. I see way too many developers getting burned out striving for that big payout that may never come. It's the classic con game.
tmaly 10y ago
I am wondering if there will be additional complexity added to the rule making phase of this if it becomes law. While this amendment is short in length, it seems to add additional complexity to an already complex tax code. I would have liked to have seen an even simpler proposal.
koolba 10y ago
> 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. Is this why I keep seeing nominal $1 salaries?
- aetherson 10y ago
  No.
  - ccostes 10y ago
    Based on this short Wikipedia page [1] it sounds like it's done to avoid payroll taxes like social security and medicare. Any other reason to do this? [1] https://en.wikipedia.org/wiki/One-dollar_salary https://en.wikipedia.org/wiki/One-dollar_salary
- whamlastxmas 10y ago
  $1 salaries is because they get paid through a complicated structure that eventually means they owe capital gains tax (20%) instead of income tax (40%).
- steve-howard 10y ago
  In addition to the other helpful replies there's some more information here: https://en.wikipedia.org/wiki/One-dollar_salary https://en.wikipedia.org/wiki/One-dollar_salary >In the United States, this approach impacts personal tax liability, because although stock and option grants are taxed at federal income rates, they may be exempt from some portion of payroll taxes (typically 7.65%) used to fund Social Security and Medicare. They're still considered highly-compensated, just not through payroll.
AdamN 10y ago
I wish this was retroactive :-(
revo13 10y ago
More evidence as to why the income tax should be replaced with a consumption tax. Just let people make their dammed money already and apply a simple tax when they spend it. Windfalls wouldn't be "dangerous" or punitive in that model, and savers would be rewarded. --Of course I oversimplify the consumption tax, and safeguard would need to be in place on that to ensure it is not regressive with respect to necessities...
- whamlastxmas 10y ago
  High consumption tax creates an incentive to not spend your money, which is bad.This also means the millionaires and billionaires of the world get to invest their money tax-free to earn even more money, often with rent-seeking, while 95% of America is getting taxed essentially up front on the vas majority of their earnings because it gets spent on stuff like housing, food, and healthcare. This creates a massively regressive tax system, which is a super shitty thing unless you're a libertarian who can't understand the concept of marginal utility.
  - revo13 10y ago
    So you are content with having a tax system that treats you like a 1%er in the event that you cash in a payday (say $1mil - 35-40%) during a given year, despite the fact that you may have worked your whole life at a middle class level, scraping to save? A consumption tax would allow individuals to actually make choices about how/when they are taxed. Lets be honest, people will still want their "stuff". If they have more money in their pocket, they will spend. That is what America is built on. I would like the opportunity to defer spending at my choice in order to save more in the present without being taxed into oblivion. And I'm sorry if you didn't read my entire comment. Of course an ignorant consumption tax is regressive. SAFEGUARDS would have to be in place to ensure that the population can acquire necessities without an undue burden being placed on them. Exactly the things you mention: housing (single home), food, healthcare. However, 50"+ 4K TVs do not fall in that category. 30' fishing boats do not fall in that category. Certain items in sales tax heavy states (Texas) already do this is the form of tax free checkout for certain item classes (food at grocery stores).
k2xl 10y ago
I'm confused. I bought shares this year and would be hit with 50K tax bill from AMT next year. Does this mean I don't owe AMT addition next year?
- harryh 10y ago
  You'll (very probably) still owe AMT taxes. Just because the house passes a bill doesn't mean it's a law. It also has to pass the Senate and be signed by the President (or go through the veto process).
  - k2xl 10y ago
    If this bill did pass, would I not owe taxes?
    - harryh 10y ago
      Unclear. Probably you still would. Generally new laws only affect future years though it can depend.
matt_wulfeck 10y ago
> 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 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.
- Cyclone_ 10y ago
  It's good to incentivize companies to look after their employees. This rule doesn't seem to complicate the system very much.
- jlarocco 10y ago
  The tax system has always been a mess and there are exceptions and loopholes for everything. I don't disagree that it's bad, but I don't know why you'd expect it to change all of the sudden with these rules. And those two specific exceptions don't seem particularly bad, IMO.
- shados 10y ago
  the US is in a weird position where the federal government actually has very little power. But it has tax power. So they just use taxes as a way to manipulate things in the way they want. But as far as I understand, the US tax system is also one of the 2-3 most complicated in the world... Being an permanent resident and not being used to this from my home country, Im making a lot of suboptimal financial decisions purely to avoid complicating my taxes... eg: I avoid consulting like plague, even when I have a worthwhile opportunity to do so.
  - pc86 10y ago
    The cost of a CPA is many orders of magnitude less than whatever "suboptimal financial decisions" you are making. Not consulting to make your taxes easier is borderline idiotic at standard 1099 developer rates. Two or three hours in a year pays for the CPA and all the overhead.
zkhalique 10y ago
Meanwhile, the USA actively encourages companies to offshore their money with their tax code: https://en.wikipedia.org/wiki/Companies_of_the_United_States_with_untaxed_profits https://en.wikipedia.org/wiki/Companies_of_the_United_States...
calcsam 10y ago
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 public. If you are awarded stock options, an you exercise them, you have to file an 83(b) election within 90 days or else you are liable on all paper gains in the value of your stock. Even if you file an 83b election, you are still liable for paper gains between the value of your options when you were granted them and the value when you exercised. For example, if you were awarded options with a strike price of $5 and the company raised a new round of funding and the 409A valuation (& strike price of the new options) has risen to $15 per share, the IRS considers that you now owe taxes on $10 of income / share. In other words, it costs you not $5 / share to exercise but ~$8.50 including taxes. So the tricky part about options is that they require money to exercise, money that you often don't have ready, in order to obtain an asset that is (a) not liquid and (b) may decline in value (c) you often can't sell due to transfer restrictions. 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. As a result of this problem with options, many startups -- especially later-stage ones like Uber -- choose instead to offer RSUs, which are basically stock grants as opposed to stock options. You don't have to pay any money to "get" them like you do for options. However, the IRS considers stock grants, unlike options, immediately taxable income. If you get 10,000 RSUs per year, and the stock is valued at $5/share by an auditor, you now have to pay taxes on $50,000 of additional income, for an asset that you likely have no way of selling. Some startups allow "net" grants -- which basically means they keep ~35% of your stock in lieu of taxes. That solves the liquidity problem, but offering this is completely at the discretion of the startup and some don't, which leaves employees at the mercy of the IRS, again having to pay cash on paper gains of an illiquid asset.
- Eridrus 10y ago
  > 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 your liability is due.
grellas 10y ago
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/text 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).
- ynniv 10y ago
  If one receives options before they are valuable, then there is a high valuation during which assets are illiquid and one defers taxes, then the value collapses as the company folds, are you still stuck with a huge tax bill? If so nothing has been fixed. There's no point in patting politicians on the back if there is a simple fix and instead they passed a complicated partial fix.
gtrubetskoy 10y ago
I still don't understand why taxes are owed. If an option at the time of grant is worth $0 (which is how it's typically done or is that not the case?), then you don't owe anything to the IRS until you exercise the option, i.e. buy shares at the option price and sell them at presumably higher valuation and make some money, at which point you will need to part with some of it because it's income. But if you never exercise the options, then you never owe any tax. What am I missing here?
- toomuchtodo 10y ago
  If you exercise your ISO options (because of option expiration clauses, typically 90 days after you leave a company), but then don't (or can't due to no market for the shares) immediately sell those shares, the spread between the option grant price and the current 409A valuation is due as AMT tax. You have not realized an event where cash is in your pocket, but you still owe tax on the "gain". You ask what does it matter if the options aren't exercised. Excellent question! It means all that potential compensation you were offered (because you took a lower salary usually in return for options) is now worthless. People don't want to work for free, or have their potential future compensation evaporate.
  - gtrubetskoy 10y ago
    I see... So what should in theory fix it is if the company granting you the options also provided a guarantee that they will buy shares from you should you be inclined to sell them (A sort of a "sell at current price" option I suppose). This way you can exercise the options, and sell enough shares to cover the tax obligation and hang on to the rest.
    - toomuchtodo 10y ago
      Bookmarked to come back later to add detail. There is a better way where your company lets you exercise all your options immediately when you're hired, and you return non-vested shares when you leave.
jkern 10y ago
How does this relate to the push for startups to change from a 90 day to 10 year exercise window? It seems like that's a better option than this bill since it gives employees a larger time window to make an exercise decision, during which the likelyhood of options actual resulting in something liquid is much higher
cdbattags 10y ago
How would this affect the concept of phantom stock options? I worked at a startup who used the main excuse of no taxes paid handing out ghost options instead of normal options. "Phantom stock can, but usually does not, pay dividends. When the grant is initially made or the phantom shares vest, there is no tax impact. When the payout is made, however, it is taxed as ordinary income to the grantee and is deductible to the employer." https://en.wikipedia.org/wiki/Phantom_stock https://en.wikipedia.org/wiki/Phantom_stock
stevenae 10y ago
The article appears to get the "seven years" qualification wrong. The bill states that tax must be paid at: >> the date that is 7 years after the first date the rights of the employee in such stock are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier Which implies that transfer-restricted stock grants do not start this clock ticking.
djrogers 10y ago
This is good news, but it may not go anywhere - "the Administration strongly opposes H.R. 5719 because it would increase the Federal deficit by $1 billion over the next ten years." [1] So a really bad tax rule is in place, but since it happens to bring in ~$100M/yr, we shouldn't fix the rule? [1]https://www.whitehouse.gov/sites/default/files/omb/legislative/sap/114/saphr5719r_20160920.pdf https://www.whitehouse.gov/sites/default/files/omb/legislati...
- dragonwriter 10y ago
  > So a really bad tax rule is in place, but since it happens to bring in ~$100M/yr, we shouldn't fix the rule? Assuming, for the sake of argument, agreement that the rule is bad, fixing it without paying the cost at the same time may still be worse.
  - st3v3r 10y ago
    While true, on the scale of the federal government, $1 billion is pretty trivial.
    - dragonwriter 10y ago
      If you make a policy of ignoring individual things because the cost in isolation is trivial, the sum of those ends up not being trivial. Or, as is popularly misattributed to (but endorsed by) Senator Everett Dirksen: "A billion here, a billion there, and soon you are talking about real money".
    - crazy2be 10y ago
      For reference, the US Federal budget in 2015 was 3.7 trillion dollars. [1] [1] https://en.wikipedia.org/wiki/United_States_federal_budget https://en.wikipedia.org/wiki/United_States_federal_budget
  - stustein 10y ago
    > fixing it without paying the cost at the same time may still be worse. That's probably true if we're talking about a tax that's more than a rounding error on the total federal budget. In an ideal world, you'd have a criteria for what makes a tax worth it. For instance, some criteria might be: 1) Does the tax raise substantial money for the on-going operation of the government or to fund critical programs? (In this case, the answer would be "no" since $100M/yr is a fraction of a fraction of our federal budget.) 2) Does it incentivize a certain type of behavior that society has deemed "good" or penalize a behavior society has deemed "bad"? (In this case, penalizing people for working at a quickly growing but illiquid company doesn't seem like it benefits/hurts society one way or the other.) 3) Can the tax be paid without undue burden to the person paying? (In this case, the burden on gains that the employee doesn't actually have in their bank account could be $100,000+ on gains they don't have yet. I'd call that undue.) I'm sure we could come up with more criteria too, but at face value, it doesn't seem like this tax has too many good legs to stand on.
ulkram 10y ago
When does this go into effect?
- etjossem 10y ago
  Only once the Senate votes for this bill (and the President signs it) will the IRS be obliged to implement it. https://www.congress.gov/bill/114th-congress/house-bill/5719/actions https://www.congress.gov/bill/114th-congress/house-bill/5719...
ulkram 10y ago
when does this go into effect?
- deleted 10y ago
  [deleted]
throwaway6497 10y ago
Dumb question: Does it mean, it is law now.
- etjossem 10y ago
  Nope, it still needs to get through the Senate and be signed into law by the President. https://www.congress.gov/bill/114th-congress/house-bill/5719/actions https://www.congress.gov/bill/114th-congress/house-bill/5719...
nullc 10y ago
Perhaps I'm misreading the law, but it looks like it solves the wrong problem: It addresses a cash-flow issue rather than the tax liability issue. Say you have options at FooCorp and you leave. FooCorp is illquid and you have 90 days to exercise your 10,000 options. Your FC options have a $5 strike, but the company currently has a 409a valuation of $100/share. To exercise the options you would need to pay $50,000 to FooCorp, then you would have a "realized gain" 950k (($100-$5)*10000 which you would owe 28% of in taxes that year, or 266k. So you would need access to $316k in total in order to exercise these options. Two issues arise: (1) You may not have $316k just kicking around. (2) THE SHARES ARE ILLIQUID AND MAY BE WORTH $0 WHEN YOU CAN ACTUALLY DO ANYTHING WITH THEM. The bill appears to help with (1) by letting you pay that 266k not now-- but later when the company shares become liquid or 7 years (whichever comes first). But it does nothing about (2) -- you might exercise and then the company goes bust, and seven years later you owe $266k and your current position is worth -50k... and because the taxes are AMT, you can't meaningfully write them off your losses against the taxes you owe. This kind of failure doesn't require FooCorp to fail. You could have options at $5, execute at $100, and have things go liquid at $7-- ignoring taxes this would have been a $20k gain. But with the taxes you're still $246k in the hole. The issue all along wasn't that someone needed extra money. The issue was the potential huge losses. If it weren't risky you could find a lender to cover the execution price and taxes in exchange for a return when the asset becomes liquid. (E.g. having to pay the $266k up front but getting it returned later when the asset becomes worthless and you write it off) If anything this makes the situation worse by encouraging more people to commit financial suicide by making it less obviously a bad idea while being just as risky as it always was.

347 points by endswapper 10y ago

This sounds great, though requiring "offering 80% of the workforce stock" and excluding highest paid executives seems vague - is this at time of hiring, when stock is issued, fully vested, when taxes are due, somewhere inbetween? I parted ways with a startup in the valley last year and exercised some shares on January 13th. If I had exercised just two weeks earlier, I'm told I would've been hit with north of 50k in AMT, I have until next year to figure it out now but I wonder if I'm eligible. Also curious how long it typically takes to get from house, through the senate and passed.

breerly 10y ago
Sounds like it's 80% of employees must have been offered stock in the year you began employment. My guess is that this applies in most common cases, although I wonder what the situation they were trying to guard from was...
- emidln 10y ago
  Would this be the case if your options have a 1 year cliff?
  - mfringel 10y ago
    Sounds like it. It's about "time of grant" as opposed to "time to vesting".
tetrep 10y ago
From the bill, a corporation qualifies (aka the current state of affairs) if... such corporation has a written plan under which, in such calendar year, not less than 80 percent of all employees who provide services to such corporation in the United States (or any possession of the United States) are granted stock options, or restricted stock units, with the same rights and privileges to receive qualified stock.
- martin_ 10y ago
  So there's no way it could be retroactively applied, then. Bummer!

chillydawg 10y ago

Nice to see tax laws for the rich can get passed, but substantive change to do with criminal justice, healthcare etc go nowhere.

breerly 10y ago
This bill simply defers the taxes till actual gains are realized, instead of requiring them when options are exercised. Ideally, this means more employees can actually act on their options, instead of just "the rich" as you imply.
- ones_and_zeros 10y ago
  The argument could be made that this is actually a gift to businesses and executives. Ultimately this bill makes working at a startup more attractive when they are already a pretty poor choice, so we'll just have more people making poor choices and putting themselves at financial risk to the benefit of their employer.
  - gshulegaard 10y ago
    While this is certainly an argument, I think the bill fixes an unintended interaction in tax law where people were getting taxed for "realized gains" that actually weren't realized...or gains at all (yet). So an alternative way of looking at it is that this bill removes an _accidental_ disincentive for innovation.
  - breerly 10y ago
    This makes it so employees can actually participate in the upside of the risk - something that the current tax setup can make impossible for employees of highly valued private companies. --- I'm Bob, I write a check for $50K to exercise my stock options. They might be worth something some day, I'm taking that risk and working my ass off to see that they are. The year I exercise the options, the gov sees that I've made a $1.5M "paper gain", and they want their taxes. Call it $300K. If Bob doesn't have $350K in the bank, he is stuck - he basically needs to wait until said company goes public to make a zero-cash sale, or forfeit his options when leaving (either by quitting or getting fired). Not to mention if Bob exercised the stock and payed the $350K - the company could never IPO, or it could and tank. Bob wouldn't see any of that money back. Bob's upside for working at said risky startup is severally limited. This is a surprise to most employees, who accepted the risk and assumed they would be able to participate in the upside of the startup (kind of the whole point). These employees find out that, in many cases, they can't actually become shareholders, or they do and lose everything. In concept, this bill would have Bob write the $50K check for the options, and then only pay taxes once and if actual liquid gains were realized. How does this only affect the rich or somehow incorrectly incentive people to work for startups? I'm happy for Bob.

adanto6840 10y ago

The bill text is here and is pretty easy to decipher: https://www.congress.gov/bill/114th-congress/house-bill/5719 https://www.congress.gov/bill/114th-congress/house-bill/5719

harryh 10y ago
Why all the goofy eligibility rules? Just get rid of the rule where exercising stock options counts as income under the AMT(1). It's line 14 in Part 1 of Form 6251. Just get rid of it! When people talk about our tax system being too complicated bills like this are why. 1. For that matter we should get rid of the AMT entirely. The fact that we have 2 separate tax systems for individuals is insane. That's a bigger story though.
- rayiner 10y ago
  We have 52 different tax systems for individuals by my count. All the states have have different rules too. Last several years, my wife and I have had to figure out our taxes five different ways on the same income.
  - MichaelBurge 10y ago
    Does Washington D.C. make a 53rd? And though income taxes are managed by the state, I suppose each county collects its own property taxes.
    - rayiner 10y ago
      Yup, 53. Or maybe 44 if you don't count the state that don't tax ordinary income.
    - maxerickson 10y ago
      Many jurisdictions smaller than states levy income taxes. I think they are usually simpler to figure (often just a single flat rate).

asah 10y ago

Can someone explain: if you exercise and hold the shares (eg leave the company) do you owe tax after year seven, even if the shares remain illiquid? That's the core issue: the IRS is taxing individuals on truly illiquid assets.

jimbokun 10y ago
True, but is it the IRS' fault if the corporation refuses to create a market for their shares? If the IRS didn't tax these shares, it would quickly become a tax shelter of epic proportions, no?
- deleted 10y ago
  [deleted]
- Zigurd 10y ago
  A key factor in whether that's truly a tax shelter is control. If your not in a position to make or even influence decisions about liquidity, you're not exactly a voluntary participant.
  - asah 10y ago
    exactly.
- sk5t 10y ago
  What's the benefit of a wholly illiquid "shelter"?
  - hacknat 10y ago
    That it will become liquid one day. If you get to make all sorts of incredible options deals under the cover of "not in the market" then you can simply make lots of situations like this happen and simply bring them to market when there is no risk involved for you anymore.
    - 10y ago

jnordwick 10y ago

Most employees get hit by the AMT and the step up in basis when exercising their incentive employee stock options, and from just skimming the bill, I don't see how that is prevented.

breerly 10y ago
I was looking for that language as well - I expected to see that "gains" from exercising options do not count towards AMT, and that related taxes are completely deferred until the time when the investment becomes liquid (or 7 years?).
stustein 10y ago
If the income is deferred, I would imagine that it wouldn't apply to AMT calculations. It'd be nice for that language to be explicit though. Regardless, the Obama Administration "strongly opposes" the bill in its current form since it would "increase the Federal deficit by $1 billion over the next 10 years." https://www.whitehouse.gov/sites/default/files/omb/legislative/sap/114/saphr5719r_20160920.pdf https://www.whitehouse.gov/sites/default/files/omb/legislati... I wonder how often bills with this "strong opposition" still end up getting passed anyway.
- dwaltrip 10y ago
  The federal budget was $3.8 trillion (with a "t") last year, and the deficit was $438 billion. Increasing the annual deficit by $100 million[1], or 0.02%, seems like a non-issue. [1] $1 billion over 10 years is $100 million per year.
  - stustein 10y ago
    Agreed — it's a pretty weak reason to "strongly oppose" a bill, which is why I'm wondering how likely it would be for the Administration to change their position. Like, what percentage of the time do they issue a statement in strong opposition but then end up passing the bill anyway?
- harryh 10y ago

mrfusion 10y ago

Does anyone have experience buying stock options from employees. I really want to own shares in a few companies that would never hire me :-(

Eridrus 10y ago
Companies have the right of first refusal and don't like lots of unrelated people on their cap table who only hold a small amount of shares, so don't expect this to work out
- JoshTriplett 10y ago
  Apart from adding complexity to future funding rounds, companies don't like having many different owners of shares because there's an upper bound on number of distinct stockholders above which you're considered a "public" company and have a pile of additional obligations.
chubot 10y ago
I would check out sharespost, equityzen, or equidate (and also search for them on Hacker News, as I found others mention experience with sharespost). I don't have direct experience, but I was helping a friend with a number of shares in a late stage startup research the sell side, and those are the companies that came up. It crossed my mind to buy shares but I haven't done so. For some of them, you have to be an accredited investor, which means a certain net worth/income threshold to be met. (I think the SEC is trying to prevent naive investors from getting fleeced in this "dark" market). SharesPost seems to have a fund that gets you exposure to a lot of late stage startups. AngelList apparently has a fund for early stage startups... if anyone knows anything about that I would appreciate any feedback. EDIT with more info: From my research, buying from every company is different. That is why companies like SharesPost exist. And you really should have the permission of the company to do the transaction. I think it may be possible to do it without their permission, but that's beyond my knowledge. There should be employees willing to go through this effort because they stand to benefit because you are offsetting their tax risk.
- deleted 10y ago

ap22213 10y ago

What the house needs to do is regulate startup's shady options agreements. I see way too many developers getting burned out striving for that big payout that may never come. It's the classic con game.

tmaly 10y ago

I am wondering if there will be additional complexity added to the rule making phase of this if it becomes law. While this amendment is short in length, it seems to add additional complexity to an already complex tax code. I would have liked to have seen an even simpler proposal.

koolba 10y ago

aetherson 10y ago
No.
- ccostes 10y ago
  Based on this short Wikipedia page [1] it sounds like it's done to avoid payroll taxes like social security and medicare. Any other reason to do this? [1] https://en.wikipedia.org/wiki/One-dollar_salary https://en.wikipedia.org/wiki/One-dollar_salary
whamlastxmas 10y ago
$1 salaries is because they get paid through a complicated structure that eventually means they owe capital gains tax (20%) instead of income tax (40%).
steve-howard 10y ago
In addition to the other helpful replies there's some more information here: https://en.wikipedia.org/wiki/One-dollar_salary https://en.wikipedia.org/wiki/One-dollar_salary >In the United States, this approach impacts personal tax liability, because although stock and option grants are taxed at federal income rates, they may be exempt from some portion of payroll taxes (typically 7.65%) used to fund Social Security and Medicare. They're still considered highly-compensated, just not through payroll.

AdamN 10y ago

I wish this was retroactive :-(

revo13 10y ago

More evidence as to why the income tax should be replaced with a consumption tax. Just let people make their dammed money already and apply a simple tax when they spend it. Windfalls wouldn't be "dangerous" or punitive in that model, and savers would be rewarded. --Of course I oversimplify the consumption tax, and safeguard would need to be in place on that to ensure it is not regressive with respect to necessities...

whamlastxmas 10y ago
High consumption tax creates an incentive to not spend your money, which is bad.This also means the millionaires and billionaires of the world get to invest their money tax-free to earn even more money, often with rent-seeking, while 95% of America is getting taxed essentially up front on the vas majority of their earnings because it gets spent on stuff like housing, food, and healthcare. This creates a massively regressive tax system, which is a super shitty thing unless you're a libertarian who can't understand the concept of marginal utility.
- revo13 10y ago
  So you are content with having a tax system that treats you like a 1%er in the event that you cash in a payday (say $1mil - 35-40%) during a given year, despite the fact that you may have worked your whole life at a middle class level, scraping to save? A consumption tax would allow individuals to actually make choices about how/when they are taxed. Lets be honest, people will still want their "stuff". If they have more money in their pocket, they will spend. That is what America is built on. I would like the opportunity to defer spending at my choice in order to save more in the present without being taxed into oblivion. And I'm sorry if you didn't read my entire comment. Of course an ignorant consumption tax is regressive. SAFEGUARDS would have to be in place to ensure that the population can acquire necessities without an undue burden being placed on them. Exactly the things you mention: housing (single home), food, healthcare. However, 50"+ 4K TVs do not fall in that category. 30' fishing boats do not fall in that category. Certain items in sales tax heavy states (Texas) already do this is the form of tax free checkout for certain item classes (food at grocery stores).

k2xl 10y ago

I'm confused. I bought shares this year and would be hit with 50K tax bill from AMT next year. Does this mean I don't owe AMT addition next year?

harryh 10y ago
You'll (very probably) still owe AMT taxes. Just because the house passes a bill doesn't mean it's a law. It also has to pass the Senate and be signed by the President (or go through the veto process).
- k2xl 10y ago
  If this bill did pass, would I not owe taxes?
  - harryh 10y ago
    Unclear. Probably you still would. Generally new laws only affect future years though it can depend.

matt_wulfeck 10y ago

> 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 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.

Cyclone_ 10y ago
It's good to incentivize companies to look after their employees. This rule doesn't seem to complicate the system very much.
jlarocco 10y ago
The tax system has always been a mess and there are exceptions and loopholes for everything. I don't disagree that it's bad, but I don't know why you'd expect it to change all of the sudden with these rules. And those two specific exceptions don't seem particularly bad, IMO.
shados 10y ago
the US is in a weird position where the federal government actually has very little power. But it has tax power. So they just use taxes as a way to manipulate things in the way they want. But as far as I understand, the US tax system is also one of the 2-3 most complicated in the world... Being an permanent resident and not being used to this from my home country, Im making a lot of suboptimal financial decisions purely to avoid complicating my taxes... eg: I avoid consulting like plague, even when I have a worthwhile opportunity to do so.
- pc86 10y ago
  The cost of a CPA is many orders of magnitude less than whatever "suboptimal financial decisions" you are making. Not consulting to make your taxes easier is borderline idiotic at standard 1099 developer rates. Two or three hours in a year pays for the CPA and all the overhead.

zkhalique 10y ago

Meanwhile, the USA actively encourages companies to offshore their money with their tax code: https://en.wikipedia.org/wiki/Companies_of_the_United_States_with_untaxed_profits https://en.wikipedia.org/wiki/Companies_of_the_United_States...

calcsam 10y ago

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 public. If you are awarded stock options, an you exercise them, you have to file an 83(b) election within 90 days or else you are liable on all paper gains in the value of your stock. Even if you file an 83b election, you are still liable for paper gains between the value of your options when you were granted them and the value when you exercised. For example, if you were awarded options with a strike price of $5 and the company raised a new round of funding and the 409A valuation (& strike price of the new options) has risen to $15 per share, the IRS considers that you now owe taxes on $10 of income / share. In other words, it costs you not $5 / share to exercise but ~$8.50 including taxes. So the tricky part about options is that they require money to exercise, money that you often don't have ready, in order to obtain an asset that is (a) not liquid and (b) may decline in value (c) you often can't sell due to transfer restrictions. 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. As a result of this problem with options, many startups -- especially later-stage ones like Uber -- choose instead to offer RSUs, which are basically stock grants as opposed to stock options. You don't have to pay any money to "get" them like you do for options. However, the IRS considers stock grants, unlike options, immediately taxable income. If you get 10,000 RSUs per year, and the stock is valued at $5/share by an auditor, you now have to pay taxes on $50,000 of additional income, for an asset that you likely have no way of selling. Some startups allow "net" grants -- which basically means they keep ~35% of your stock in lieu of taxes. That solves the liquidity problem, but offering this is completely at the discretion of the startup and some don't, which leaves employees at the mercy of the IRS, again having to pay cash on paper gains of an illiquid asset.

Eridrus 10y ago
> 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 your liability is due.

grellas 10y ago

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/text 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).

ynniv 10y ago
If one receives options before they are valuable, then there is a high valuation during which assets are illiquid and one defers taxes, then the value collapses as the company folds, are you still stuck with a huge tax bill? If so nothing has been fixed. There's no point in patting politicians on the back if there is a simple fix and instead they passed a complicated partial fix.

gtrubetskoy 10y ago

I still don't understand why taxes are owed. If an option at the time of grant is worth $0 (which is how it's typically done or is that not the case?), then you don't owe anything to the IRS until you exercise the option, i.e. buy shares at the option price and sell them at presumably higher valuation and make some money, at which point you will need to part with some of it because it's income. But if you never exercise the options, then you never owe any tax. What am I missing here?

toomuchtodo 10y ago
If you exercise your ISO options (because of option expiration clauses, typically 90 days after you leave a company), but then don't (or can't due to no market for the shares) immediately sell those shares, the spread between the option grant price and the current 409A valuation is due as AMT tax. You have not realized an event where cash is in your pocket, but you still owe tax on the "gain". You ask what does it matter if the options aren't exercised. Excellent question! It means all that potential compensation you were offered (because you took a lower salary usually in return for options) is now worthless. People don't want to work for free, or have their potential future compensation evaporate.
- gtrubetskoy 10y ago
  I see... So what should in theory fix it is if the company granting you the options also provided a guarantee that they will buy shares from you should you be inclined to sell them (A sort of a "sell at current price" option I suppose). This way you can exercise the options, and sell enough shares to cover the tax obligation and hang on to the rest.
  - toomuchtodo 10y ago
    Bookmarked to come back later to add detail. There is a better way where your company lets you exercise all your options immediately when you're hired, and you return non-vested shares when you leave.

jkern 10y ago

How does this relate to the push for startups to change from a 90 day to 10 year exercise window? It seems like that's a better option than this bill since it gives employees a larger time window to make an exercise decision, during which the likelyhood of options actual resulting in something liquid is much higher

cdbattags 10y ago

How would this affect the concept of phantom stock options? I worked at a startup who used the main excuse of no taxes paid handing out ghost options instead of normal options. "Phantom stock can, but usually does not, pay dividends. When the grant is initially made or the phantom shares vest, there is no tax impact. When the payout is made, however, it is taxed as ordinary income to the grantee and is deductible to the employer." https://en.wikipedia.org/wiki/Phantom_stock https://en.wikipedia.org/wiki/Phantom_stock

stevenae 10y ago

The article appears to get the "seven years" qualification wrong. The bill states that tax must be paid at: >> the date that is 7 years after the first date the rights of the employee in such stock are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier Which implies that transfer-restricted stock grants do not start this clock ticking.

djrogers 10y ago

This is good news, but it may not go anywhere - "the Administration strongly opposes H.R. 5719 because it would increase the Federal deficit by $1 billion over the next ten years." [1] So a really bad tax rule is in place, but since it happens to bring in ~$100M/yr, we shouldn't fix the rule? [1]https://www.whitehouse.gov/sites/default/files/omb/legislative/sap/114/saphr5719r_20160920.pdf https://www.whitehouse.gov/sites/default/files/omb/legislati...

dragonwriter 10y ago
> So a really bad tax rule is in place, but since it happens to bring in ~$100M/yr, we shouldn't fix the rule? Assuming, for the sake of argument, agreement that the rule is bad, fixing it without paying the cost at the same time may still be worse.
- st3v3r 10y ago
  While true, on the scale of the federal government, $1 billion is pretty trivial.
  - dragonwriter 10y ago
    If you make a policy of ignoring individual things because the cost in isolation is trivial, the sum of those ends up not being trivial. Or, as is popularly misattributed to (but endorsed by) Senator Everett Dirksen: "A billion here, a billion there, and soon you are talking about real money".
  - crazy2be 10y ago
    For reference, the US Federal budget in 2015 was 3.7 trillion dollars. [1] [1] https://en.wikipedia.org/wiki/United_States_federal_budget https://en.wikipedia.org/wiki/United_States_federal_budget
- stustein 10y ago
  > fixing it without paying the cost at the same time may still be worse. That's probably true if we're talking about a tax that's more than a rounding error on the total federal budget. In an ideal world, you'd have a criteria for what makes a tax worth it. For instance, some criteria might be: 1) Does the tax raise substantial money for the on-going operation of the government or to fund critical programs? (In this case, the answer would be "no" since $100M/yr is a fraction of a fraction of our federal budget.) 2) Does it incentivize a certain type of behavior that society has deemed "good" or penalize a behavior society has deemed "bad"? (In this case, penalizing people for working at a quickly growing but illiquid company doesn't seem like it benefits/hurts society one way or the other.) 3) Can the tax be paid without undue burden to the person paying? (In this case, the burden on gains that the employee doesn't actually have in their bank account could be $100,000+ on gains they don't have yet. I'd call that undue.) I'm sure we could come up with more criteria too, but at face value, it doesn't seem like this tax has too many good legs to stand on.

ulkram 10y ago

When does this go into effect?

etjossem 10y ago
Only once the Senate votes for this bill (and the President signs it) will the IRS be obliged to implement it. https://www.congress.gov/bill/114th-congress/house-bill/5719/actions https://www.congress.gov/bill/114th-congress/house-bill/5719...

ulkram 10y ago

when does this go into effect?

deleted 10y ago
[deleted]

throwaway6497 10y ago

Dumb question: Does it mean, it is law now.

etjossem 10y ago
Nope, it still needs to get through the Senate and be signed into law by the President. https://www.congress.gov/bill/114th-congress/house-bill/5719/actions https://www.congress.gov/bill/114th-congress/house-bill/5719...

nullc 10y ago

Perhaps I'm misreading the law, but it looks like it solves the wrong problem: It addresses a cash-flow issue rather than the tax liability issue. Say you have options at FooCorp and you leave. FooCorp is illquid and you have 90 days to exercise your 10,000 options. Your FC options have a $5 strike, but the company currently has a 409a valuation of $100/share. To exercise the options you would need to pay $50,000 to FooCorp, then you would have a "realized gain" 950k (($100-$5)*10000 which you would owe 28% of in taxes that year, or 266k. So you would need access to $316k in total in order to exercise these options. Two issues arise: (1) You may not have $316k just kicking around. (2) THE SHARES ARE ILLIQUID AND MAY BE WORTH $0 WHEN YOU CAN ACTUALLY DO ANYTHING WITH THEM. The bill appears to help with (1) by letting you pay that 266k not now-- but later when the company shares become liquid or 7 years (whichever comes first). But it does nothing about (2) -- you might exercise and then the company goes bust, and seven years later you owe $266k and your current position is worth -50k... and because the taxes are AMT, you can't meaningfully write them off your losses against the taxes you owe. This kind of failure doesn't require FooCorp to fail. You could have options at $5, execute at $100, and have things go liquid at $7-- ignoring taxes this would have been a $20k gain. But with the taxes you're still $246k in the hole. The issue all along wasn't that someone needed extra money. The issue was the potential huge losses. If it weren't risky you could find a lender to cover the execution price and taxes in exchange for a return when the asset becomes liquid. (E.g. having to pay the $266k up front but getting it returned later when the asset becomes worthless and you write it off) If anything this makes the situation worse by encouraging more people to commit financial suicide by making it less obviously a bad idea while being just as risky as it always was.