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Filing Taxes After Exercising Start Up Options
- abalone 10y agoI would add one thing: if you're really going to exercise options before you can sell them, which is what this article's about, you really should calculate the tax consequence beforehand. As is only hinted in the article, the AMT can be enormous if the valuation has grown a lot since the grant date.
- hesdeadjim 10y agoAlso an issue with NQSOs, though AMT doesn't enter the picture just regular cap "gains" (I use the term loosely because the IRS doesn't care that you have no way of actually realizing that gain as cash).
- kyleblarson 10y agoI think you should at least mention the option of hiring a professional accountant.
- Apes 10y agoAnyone have a professional accountant in San Francisco they would recommended for this sort of thing?
- buckhx 10y agoWould love an accountant rec in NYC as well.
- charliepark 10y agoI have one in Marin I recommend. Email is in my profile.
- lloyddobbler 10y agoHe does - last thing he leaves the reader with.
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- iooi 10y agoThank you for this, I exercised stock options last year but never received form 3921 from my ex-employer. What are my next steps here? I reached out to my employer, but I doubt they'll get back to me. Do I need to report this to the IRS?
- harryh 10y agoSemi related to this blog post: A lot of people don't realize that you can exercise ISOs before they vest. If you are sure that you are going to be exercising your options there is no reason to wait until they vest and, in fact, there are disadvantages to doing so. As soon as you get your options (within 30 days. there is a time limit.) you tell your company you want to exercise then and file and 83B with the IRS indicating that you have done so. This avoids potential AMT taxes at the time of exercise and starts to clock on making your gains long term capital gains which are taxed at a lower rate.
- lloyddobbler 10y agoIIRC, this is on a company-by-company basis. Only some companies offer early exercise (i.e., exercising your options prior to vesting). It's a great practice to do, if you believe the company is going to do well. Goes a long way towards minimizing the AMT burden.
- harryh 10y agoYes, this is true. I will add that I have found that if you ask hard enough there is a good chance that companies that say that they don't do this at first will end up allowing you to do so. There's really no good reason for them not to.
- mnutt 10y agoI would imagine that the reason many companies are reluctant to do this (or at least don't advertise it) is because advising employees whether they should or should not do it amounts to giving financial planning advice. Asking hard enough probably means showing you have weighed your own financial situation and understand the risks.
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- hkmurakami 10y ago
- EternalData 10y agoThere should be a guide overall on how RSUs work, especially in an early-stage context, for startup employees. I feel like people toss percentages around but don't grasp the meaning of what they're about. This guide basically convinced me I need to talk to an attorney and accountant haha.
- Buge 10y agoAs I understand it, RSUs are a lot simpler. You don't need to do anything when they are granted to you. And when they vest, they count as normal income at the value at vest time.
- tunesmith 10y agoIs there ever any reason to exercise options with a FMV below the strike price? I know someone who left her job and is in that situation (private company), seems like she should just ignore them entirely and let the options expire. I suppose if she had good reason to believe the company would bounce back they'd be nice to have, but otherwise it seems just like buying stock for more than the going market rate.
- maerF0x0 10y agoAccess/control is the only reason I can come up with. Access: One often doesnt have an option to buy shares in a private company besides the granted options. Control: If one had 49% of share and options as you described for 2% one could take control of the company? Extremely edge case. She could hold them until just before the expiry to see if they do bounce back in the window.
- seibelj 10y agoIf some random person on the internet wants to help me out. If I exercised my options, and the company was purchased later the same year and my common shares were purchased for $0 (preferred shares took all the money, leaving common with zero), how do I file this loss?
- laxatives 10y agoI'm by no means an expert, but I believe you should ask for a 1099B with proceeds at $0 and cost-basis at either $0 and marked as not reported, or with cost-basis equal to your expense. If the former is the case (not reported), you report the cost-basis yourself.
- seibelj 10y agoThanks for the info!
- maverick_iceman 10y agoIt is ridiculous to charge taxes based on fictitious paper valuations. I think taxes should be imposed only when shares are sold resulting in cash.
- sokoloff 10y agoIf you act in a certain way, you are free to accomplish that for yourself. Only ever do a same-day exercise-and-sell. Never exercise early. Never exercise-and-hold. Enter into a 10b5-1 that ensures you sell any shares immediately upon vesting. I think that covers all the cases and you're protected against being taxed on paper-only valuations. That doesn't mean that your preference should preclude other people from acting differently.
- maerF0x0 10y agoBut it does mean that one has to abandon said "fictitious" value if ever leaving a company (usually 90 days) .
- prostoalex 10y agoThis opens a number of loopholes related mostly to income and estate tax avoidance. Shares of companies can be transferred to heirs for an arbitrary strike price and if they're never sold, there's no capital gain tax, no income tax and no estate tax liability generated. Rinse and repeat for multiple generations. AMT is a quick fix to allow the government to tax the transfer of assets per se.
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