5 ms·

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

by 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.
    - beagle3 10y ago
      So? Why should taxes be paid unless there are actual gains? What's the problem with waiting until gains are realized to tax them? If there's still risk, taxes are paid, and the risk materializes and no gains are made at the end, how is that fair?
      - rhapsodic 10y ago
        > So? Why should taxes be paid unless there are actual gains? What's the problem with waiting until gains are realized to tax them? Exactly. And what the article or the linked Bill summary fails to make clear (unless I missed it) is whether the tax amount is based on the value of the stock the day the options are exercised, or when the tax is paid. By the time the stock becomes liquid, it might be worth far less than that it was when the options were when the options were exercised. Maybe far less than the actual tax bill. And what happens if the stock's value goes to zero? I'm with you on this. I don't see why they can't tax this like any other stock trade, where you pay tax on the actual monetary gain, after it has been realized.
- beagle3 10y ago
  No. But it isn't the individual's fault either. And it IS the IRS' fault for taxing an illiquid asset as if it were liquid. The only way that this sort of makes sense is if you can pay your tax in illiquid assets - e.g. If you can pay your tax with the same shares. The most logical tax code I know can be summarized as: no basis step-up except on an event when taxes are paid; taxes are paid whenever (and only if) something liquid gets exchanged. Even an exchange of illiquid with illiquid doesn't trigger step up or tax event. As long as it is illiquid, taxing gains seems about as logical is randomly announcing "everyone should mark their assets now and pay taxes on unrealized gains" (which the IRS actually does if your financial asset is outside the US, but it is still crazy)
  - overdrivetg 10y ago
    I can't upvote this enough. If the IRS is ascribing value X to stock options I can't liquidate, I should be able to pay my tax in the form of those options at whatever value I am being taxed on them. Of course, the devil's in the details as you probably don't want the government having voting shares in a bunch of private companies either... Maybe they just get a blanket clause to automatically exercise and sell as part of any IPO offering or something? This could have a double-down effect too as the government owns more illiquid stock and feels firsthand the pain of regulations (SarbOx anyone??) that result in fewer IPOs / longer time horizons to liquidity. Oh your revenue is going down because you've regulated companies out of the IPO market? Great, looks like time to get off your ass and actually FIX THE PROBLEM. C'mon guys.
- imh 10y ago
  Would it become a tax shelter, though? You could just tax the difference between what goes in and what goes out on the date that it comes out. If it never comes out, it's worthless and that's the point.
bofia 10y ago
The liquidity of startup shares has gotten better in recent times. I'm an engineer at http://www.equityzen.com http://www.equityzen.com, a marketplace for pre-IPO shares, and I believe more shareholders are starting to see that selling before an exit is a viable option for faster liquidity. We helped lobby and push for this bill and I'm glad to see it making progress in providing better options for startup employees.
- ng12 10y ago
  The second market is a bandaid. In addition to sub-par prices there's a huge bottleneck in the demand for shares, which is extremely volatile. And if cofounder X decides to offload 10% of his shares it'll wipe out any demand there is. Equity is awful for a lot of reasons, but I'll never be convinced second-market selling is the panacea.

by asah 10y ago

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.
  - beagle3 10y ago
    So? Why should taxes be paid unless there are actual gains? What's the problem with waiting until gains are realized to tax them? If there's still risk, taxes are paid, and the risk materializes and no gains are made at the end, how is that fair?
    - rhapsodic 10y ago
      > So? Why should taxes be paid unless there are actual gains? What's the problem with waiting until gains are realized to tax them? Exactly. And what the article or the linked Bill summary fails to make clear (unless I missed it) is whether the tax amount is based on the value of the stock the day the options are exercised, or when the tax is paid. By the time the stock becomes liquid, it might be worth far less than that it was when the options were when the options were exercised. Maybe far less than the actual tax bill. And what happens if the stock's value goes to zero? I'm with you on this. I don't see why they can't tax this like any other stock trade, where you pay tax on the actual monetary gain, after it has been realized.
beagle3 10y ago
No. But it isn't the individual's fault either. And it IS the IRS' fault for taxing an illiquid asset as if it were liquid. The only way that this sort of makes sense is if you can pay your tax in illiquid assets - e.g. If you can pay your tax with the same shares. The most logical tax code I know can be summarized as: no basis step-up except on an event when taxes are paid; taxes are paid whenever (and only if) something liquid gets exchanged. Even an exchange of illiquid with illiquid doesn't trigger step up or tax event. As long as it is illiquid, taxing gains seems about as logical is randomly announcing "everyone should mark their assets now and pay taxes on unrealized gains" (which the IRS actually does if your financial asset is outside the US, but it is still crazy)
- overdrivetg 10y ago
  I can't upvote this enough. If the IRS is ascribing value X to stock options I can't liquidate, I should be able to pay my tax in the form of those options at whatever value I am being taxed on them. Of course, the devil's in the details as you probably don't want the government having voting shares in a bunch of private companies either... Maybe they just get a blanket clause to automatically exercise and sell as part of any IPO offering or something? This could have a double-down effect too as the government owns more illiquid stock and feels firsthand the pain of regulations (SarbOx anyone??) that result in fewer IPOs / longer time horizons to liquidity. Oh your revenue is going down because you've regulated companies out of the IPO market? Great, looks like time to get off your ass and actually FIX THE PROBLEM. C'mon guys.
imh 10y ago
Would it become a tax shelter, though? You could just tax the difference between what goes in and what goes out on the date that it comes out. If it never comes out, it's worthless and that's the point.

bofia 10y ago

The liquidity of startup shares has gotten better in recent times. I'm an engineer at http://www.equityzen.com http://www.equityzen.com, a marketplace for pre-IPO shares, and I believe more shareholders are starting to see that selling before an exit is a viable option for faster liquidity. We helped lobby and push for this bill and I'm glad to see it making progress in providing better options for startup employees.

ng12 10y ago
The second market is a bandaid. In addition to sub-par prices there's a huge bottleneck in the demand for shares, which is extremely volatile. And if cofounder X decides to offload 10% of his shares it'll wipe out any demand there is. Equity is awful for a lot of reasons, but I'll never be convinced second-market selling is the panacea.