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> Do stock options holders need to pay tax even if they have not added actual money to their bank account? Yes. The options are converted into shares, which i
by antognini 10y ago
> Do stock options holders need to pay tax even if they have not added actual money to their bank account?
Yes. The options are converted into shares, which is considered a taxable event by the IRS. Ordinarily this isn't a problem because you can sell some fraction of the stock that you gained to pay for the taxes. But if the company is not public, you have no easy way to sell the shares.
> If I don't have the money in my bank account yet, how can I pay this huge amount of gains tax even?
That's exactly the problem. Many employees at unicorn startups are stuck in "golden handcuffs." If they leave, they oftentimes can't exercise their options due to the taxes, in which case they lose them. This forces them to stay in the hopes that one day the company will go public and they can exercise their options.
- derekp7 10y agoJust to make this clear (correct me if I'm wrong)... If you buy stock at market value, and it increases in value over time, you only pay tax when you sell it. But if you exercise a stock option (in which you purchase stock for a [typically] lower price than current value), the difference in value is considered the same as if you received any other non-monetary income (i.e, that difference in value is treated the same as a stock grant), in which you would have to pay tax in the current year. Did that about sum it up?
- antognini 10y agoThat's my understanding of it.