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Should have been titled "... in the USA" as tax rules are very different in other countries. For instance, in France, you only owe money to the taxperson when

Should have been titled "... in the USA" as tax rules are very different in other countries. For instance, in France, you only owe money to the taxperson when you sell your shares, for a profit. If you sell for a loss, this is tax-deducible.

zzalpha 10y ago
Doesn't apply to Canada, either. Well, unless the options are for shares in a non-Canadian controlled private corporation. Got bit by that little loophole in my late stage startup when facing options expiration...
- emilecantin 10y ago
  Got any good sources on what exactly the rules are in Canada?
  - zzalpha 10y ago
    This is actually a pretty good summary: http://www.taxplanningguide.ca/tax-planning-guide/section-1-businesses/the-taxation-stock-options/ http://www.taxplanningguide.ca/tax-planning-guide/section-1-... Not, the 50% income deduction also applies to non-CCPC shares if the circumstances are right, which brings the income tax down to approximately capital gains... which at least softens the blow a bit.
  - throwaay1000111 10y ago
    Taxes on income (share value - option strike price) become owing on option exercise. If the company is not a CCPC and the value of the options at grant-time were less than the share value, you may qualify for a 50% deduction (bringing it in line with capital gains), subject to some conditions (arms-length dealing, etc). If the company is a CCPC, you can defer the taxes until the shares are sold. If sold within 2 years, you pay full income tax. If sold after 2 years of holding, a 50% deduction applies bringing it in line with capital gains. CCPC status of options are grandfathered in so if the company loses CCPC status, your options continue to qualify. Keep in mind that going bankrupt/company sale are forced sales of your shares, which could hit you with a big tax bill and since that tax bill is income (not cap gains), the capital losses of the sale cannot be used to offset it! CCPC employees should also look at the lifetime capital gains exemption (LCGE) of $750000 to reduce taxes on the capital gains following exercise, and the allowable business investment loss (ABIL) which can be used to halve the tax owing in the downside case. In theory, the 50% deductions mentioned above and the ABIL stack to reduce the tax owed to 0. The problem with all of this stuff is that when you exercise, there is no way to know what deductions you will qualify for under various hypothetical scenarios. It feels like tax laws just aren't set up to deal with the notion of illiquid shares and fairy tale valuations.
- uiri 10y ago
  Just to clarify for those who may be less familiar with Canadian tax rules: Canadian-controlled private corporation is exactly what it sounds like and has special tax rules (including lower tax rates) in Canada. I interpret the parent as referring to options in a corporation that is not a CCPC rather than options in a private corporation controlled by non-Canadians.
  - zzalpha 10y ago
    Correct. Options exercised in a CCPC don't result in a tax hit until the shares are liquidated. Options exercised in a non-CCPC are subject to income tax on the difference between strike price and FMV of the shares at the time of exercise. Fun!
Someone1234 10y ago
The US really does have a lot of problems with their tax system to be honest. For a country whose citizens outwardly hate tax, you'd think they would have one of the best, most straightforward, and fair tax systems in the world. But instead you have one of the most convoluted, loopholey, broken systems in the world. Whereas in countries where taxes aren't as "hated" (Europe, Canada, etc) they don't pay a cent to file taxes, have less loopholes, it is less complicated, and overall fairer. If I was an American I'd hate tax too, but you guys made it that way. Why does it still cost money to file taxes anyway?
- arethuza 10y ago
  Most people in the UK don't even need to do tax returns.
  - wfh 10y ago
    I lived and worked in the UK for decades and never did my own tax return. When I moved to the US, the UK taxman spotted this, calculated that I had overpaid my taxes for that year and sent me a refund automatically. I guess the reason why it's not done this way in the US is a combination of the general mistrust of government, and the lobbying from companies like Intuit to keep the tax system as complex as it is now.
    - dpark 10y ago
      The tax system was a mess before Intuit existed. I don't see a way to lay the blame at their feet.
      - mattkrause 10y ago
        Others may messed it up, but Intuit lobbies to keep things that way. Here's their lobbyist's disclosure form. It says "Oppose IRS government tax preparation" right there in Box 16. https://soprweb.senate.gov/index.cfm?event=getFilingDetails&filingID=2A0E2ECE-33A2-44E9-A822-7F0ECAB409AC&filingTypeID=60 https://soprweb.senate.gov/index.cfm?event=getFilingDetails&... Their SEC disclosure says essentially the same thing. Grab it from here: http://investors.intuit.com/financial-information/annual-reports/default.aspx http://investors.intuit.com/financial-information/annual-rep... Specifically, on page 10 of the 2016 version: "We are a member of the Free File Alliance, a consortium of private sector companies that has entered into an agreement with the federal government. Under this agreement, the member companies provide online federal tax preparation and filing services at no cost to eligible federal taxpayers, and the federal government has agreed not to provide a competing service.... However, future administrative, regulatory, or legislative activity in this area could harm our Consumer Tax business."
bluejekyll 10y ago
This is true in the US as well. And until the 409a rule, it was also exactly how you state. After 409a, private companies are required to speculate at their current value, and this sets the difference between your strike price and that at which you purchased the stock. It's this difference which is taxable. The US was trying to fix something that didn't exactly have a problem, making sure people are being taxed on profits, I think this was misguided. The unintended consequences are exactly what is spelled out in this article, people with less means cannot exercise stock b/c of two reasons, the cost and then the tax, actually raising the cost on illiquid assets. This is broken, and causes the type of self imposed entrapment described in the article. If this is a big deal to you, contact you congresspeople and ask them to "fix" or so that the tax is only due on liquidation of the stock.
- rrhyne 10y ago
  See my top level comment regarding legislation in progress to fix the issue.
iaw 10y ago
Honest question: what percentage of unicorn start-ups are outside of the US? Being modestly familiar with legal restrictions around closing offices in France I'd be surprised if the scene there was massive.
Eridrus 10y ago
Are you sure this is true? That when a public company such as Google gives you shares as part of your employment it is not considered income and taxed that way?
simonjgreen 10y ago
This does not apply in the UK either. You pay capital gains tax only when you realise the value.

zzalpha 10y ago

Doesn't apply to Canada, either. Well, unless the options are for shares in a non-Canadian controlled private corporation. Got bit by that little loophole in my late stage startup when facing options expiration...

emilecantin 10y ago
Got any good sources on what exactly the rules are in Canada?
- zzalpha 10y ago
  This is actually a pretty good summary: http://www.taxplanningguide.ca/tax-planning-guide/section-1-businesses/the-taxation-stock-options/ http://www.taxplanningguide.ca/tax-planning-guide/section-1-... Not, the 50% income deduction also applies to non-CCPC shares if the circumstances are right, which brings the income tax down to approximately capital gains... which at least softens the blow a bit.
- throwaay1000111 10y ago
  Taxes on income (share value - option strike price) become owing on option exercise. If the company is not a CCPC and the value of the options at grant-time were less than the share value, you may qualify for a 50% deduction (bringing it in line with capital gains), subject to some conditions (arms-length dealing, etc). If the company is a CCPC, you can defer the taxes until the shares are sold. If sold within 2 years, you pay full income tax. If sold after 2 years of holding, a 50% deduction applies bringing it in line with capital gains. CCPC status of options are grandfathered in so if the company loses CCPC status, your options continue to qualify. Keep in mind that going bankrupt/company sale are forced sales of your shares, which could hit you with a big tax bill and since that tax bill is income (not cap gains), the capital losses of the sale cannot be used to offset it! CCPC employees should also look at the lifetime capital gains exemption (LCGE) of $750000 to reduce taxes on the capital gains following exercise, and the allowable business investment loss (ABIL) which can be used to halve the tax owing in the downside case. In theory, the 50% deductions mentioned above and the ABIL stack to reduce the tax owed to 0. The problem with all of this stuff is that when you exercise, there is no way to know what deductions you will qualify for under various hypothetical scenarios. It feels like tax laws just aren't set up to deal with the notion of illiquid shares and fairy tale valuations.
uiri 10y ago
Just to clarify for those who may be less familiar with Canadian tax rules: Canadian-controlled private corporation is exactly what it sounds like and has special tax rules (including lower tax rates) in Canada. I interpret the parent as referring to options in a corporation that is not a CCPC rather than options in a private corporation controlled by non-Canadians.
- zzalpha 10y ago
  Correct. Options exercised in a CCPC don't result in a tax hit until the shares are liquidated. Options exercised in a non-CCPC are subject to income tax on the difference between strike price and FMV of the shares at the time of exercise. Fun!

Someone1234 10y ago

The US really does have a lot of problems with their tax system to be honest. For a country whose citizens outwardly hate tax, you'd think they would have one of the best, most straightforward, and fair tax systems in the world. But instead you have one of the most convoluted, loopholey, broken systems in the world. Whereas in countries where taxes aren't as "hated" (Europe, Canada, etc) they don't pay a cent to file taxes, have less loopholes, it is less complicated, and overall fairer. If I was an American I'd hate tax too, but you guys made it that way. Why does it still cost money to file taxes anyway?

arethuza 10y ago
Most people in the UK don't even need to do tax returns.
- wfh 10y ago
  I lived and worked in the UK for decades and never did my own tax return. When I moved to the US, the UK taxman spotted this, calculated that I had overpaid my taxes for that year and sent me a refund automatically. I guess the reason why it's not done this way in the US is a combination of the general mistrust of government, and the lobbying from companies like Intuit to keep the tax system as complex as it is now.
  - dpark 10y ago
    The tax system was a mess before Intuit existed. I don't see a way to lay the blame at their feet.
    - mattkrause 10y ago
      Others may messed it up, but Intuit lobbies to keep things that way. Here's their lobbyist's disclosure form. It says "Oppose IRS government tax preparation" right there in Box 16. https://soprweb.senate.gov/index.cfm?event=getFilingDetails&filingID=2A0E2ECE-33A2-44E9-A822-7F0ECAB409AC&filingTypeID=60 https://soprweb.senate.gov/index.cfm?event=getFilingDetails&... Their SEC disclosure says essentially the same thing. Grab it from here: http://investors.intuit.com/financial-information/annual-reports/default.aspx http://investors.intuit.com/financial-information/annual-rep... Specifically, on page 10 of the 2016 version: "We are a member of the Free File Alliance, a consortium of private sector companies that has entered into an agreement with the federal government. Under this agreement, the member companies provide online federal tax preparation and filing services at no cost to eligible federal taxpayers, and the federal government has agreed not to provide a competing service.... However, future administrative, regulatory, or legislative activity in this area could harm our Consumer Tax business."

bluejekyll 10y ago

This is true in the US as well. And until the 409a rule, it was also exactly how you state. After 409a, private companies are required to speculate at their current value, and this sets the difference between your strike price and that at which you purchased the stock. It's this difference which is taxable. The US was trying to fix something that didn't exactly have a problem, making sure people are being taxed on profits, I think this was misguided. The unintended consequences are exactly what is spelled out in this article, people with less means cannot exercise stock b/c of two reasons, the cost and then the tax, actually raising the cost on illiquid assets. This is broken, and causes the type of self imposed entrapment described in the article. If this is a big deal to you, contact you congresspeople and ask them to "fix" or so that the tax is only due on liquidation of the stock.

rrhyne 10y ago
See my top level comment regarding legislation in progress to fix the issue.

iaw 10y ago

Honest question: what percentage of unicorn start-ups are outside of the US? Being modestly familiar with legal restrictions around closing offices in France I'd be surprised if the scene there was massive.

Eridrus 10y ago

Are you sure this is true? That when a public company such as Google gives you shares as part of your employment it is not considered income and taxed that way?

simonjgreen 10y ago

This does not apply in the UK either. You pay capital gains tax only when you realise the value.