4 ms·

Serious question here. My impression is that Silicon Valley leans heavily liberal, and as such most people there believe in a progressive tax structure and gene

by kolbe 9y ago

Serious question here. My impression is that Silicon Valley leans heavily liberal, and as such most people there believe in a progressive tax structure and generally lean towards wanting the government to receive more revenue than conservatives. If my impression is wrong, then please correct me. With this in-mind, why is there such outrage about taxing option and RSU income? It's still income. And the current situation could not be described as anything but a tax break for the "wealthy," at least insofar as Obama liked to define people as wealthy. It's an asset that you receive in connection with your labor. It's income. And you don't have to pay income tax on it (iirc, it's mostly cap gains when exercised). And it's mostly given to people who already make $150k+ a year anyway. I cannot reconcile this outrage over still having a tax dodge (but not as good of one) with the political leanings of SV.

bpicolo 9y ago
The problem is that it's explicitly not real income for those working at companies which aren't publicly traded. For publicly traded companies, you typically sell-to-cover at vesting time, so you're already doing this sort of thing usually. For private companies, that's not an option, so you would have to pay tax at vesting time for options you could quite possibly never have an opportunity to sell.
heimidal 9y ago
It's not income if you never exercise the option. Imagine starting as a senior-level manager at a company that's a few years into its life. They provide you with a salary of $150k/year and 100,000 options at $1 with a standard four-year vesting schedule. In the first year, the company's fair market value increases to $2/share. Your tax liability just increased as though you made an extra $25k, so you'll need to come up with ~$8k to cover. If the company sees its value increase 2x per year for all four years, you'll be on the hook for taxes on $675k having only made $600k in actual dollars. Good luck scraping together taxes to cover adjusted income of $525k in year 4 if the company doesn't go public. If the fair market value falls after you vest but before a liquidity event, you never saw a penny of extra liquid assets but still had to pay tens or hundreds of thousands in taxes. This will bankrupt people.
- kolbe 9y ago
  That sounds no less fair than someone who bought a home for $100k in 1980 who's seen its value appreciate to $5mm, and now has to pay $50k a year in property tax. That sounds no less fair than a family liquidating its estate because they can't afford the estate taxes. That sounds no less fair than a health-conscious person taking care to never drink or do drugs paying 10x more for socialized healthcare to pay for the ailments of an obese alcoholic. I doubt I need to go on, but the point is that taxation sucks. And it's completely hypocritical of someone to want to levy these burdens onto someone else while they themselves become indignant over a tax loophole of theirs being tightened (not even closed). It's even worse that the people who are getting indignant over it are some of the wealthiest in the United States, while at the same time, you want to stick a guy who earns $50k a year with an extra $3k with the ACA. I do admit that the story you provided sounds like it sucks more than average, but in reality, a bank will just give you a loan to cover the taxes. No one is going bankrupt. And if the shares end up going to zero, you get to have capital carryover losses just like everyone else whose investments lost money. But the point is that taxes, when you actually have to get down to it, suck. And if you're being truly democratic, you should try to empathize with all taxpayers in the same way that you think about your own taxes.
  - greenleafjacob 9y ago
    You can sell a home to cover property taxes, or even reverse mortgage to get the cash flow. You can't sell private company stock, you can't even encumber it with a lien.
abvdasker 9y ago
RSUs issued by a private company are not income because they are completely illiquid. Taxing RSUs at vest makes no sense because their value could change after they vest but before they are converted to liquid equity. In practice what this means is that maybe you get granted $1 million in RSUs by the private company you work for and pay hundreds of thousands of dollars in taxes. The private company goes bankrupt and never goes public or get acquired and the RSUs become worthless. You don't get those taxes back and you never got the $1 million.
- subprotocol 9y ago
  THIS. I believe if it goes bankrupt you at least get the taxes back. But not if the company keeps going as a zombie. You end up getting shorted by the company AND Uncle Sam here. These RSUs are called "worse than worthless".
ProblemFactory 9y ago
> why is there such outrage about taxing option and RSU income? There is no outrage, or even opposition to taxing income from selling options and RSUs. The problem arises because in some situations options and RSUs are considered "income" as themselves, not a potential to make income when they are sold. You get some options in an early-stage startup, and have to pay tax on that. But you can't actually sell your options - there is no market, and often you aren't even allowed to sell them before the company is acquired or goes public. There is still a good chance that the company will go bust before either of these happens. So you have to pay a tax bill years before you actually earn income, and potentially without ever earning income from your options.
- kolbe 9y ago
  Liquidity is not a requirement for a transfer of an asset to be considered income. If your company paid for your apartment, that's income, despite the fact that it may be impossible for you to sublease it. Certainty of future value is not a requirement for something to be considered income. You get paid in dollars all the time, but that's just an asset with fluctuating value. There are several loopholes that get around the definition of income to defer or avoid taxes for certain types of income, but that's exactly what this is: a loophole for the wealthy. And I have no problem with SV employees enjoying tax breaks. I just can't reconcile SV's love of taxing other people, avoiding it for themselves, and still claiming this is a moral, rather than selfish, stance.
  - sk5t 9y ago
    You fail to recognize that most options / private company shares are not negotiable or redeemable, period. They cannot be converted to income or other benefit by any mechanism.

by kolbe 9y ago

bpicolo 9y ago

The problem is that it's explicitly not real income for those working at companies which aren't publicly traded. For publicly traded companies, you typically sell-to-cover at vesting time, so you're already doing this sort of thing usually. For private companies, that's not an option, so you would have to pay tax at vesting time for options you could quite possibly never have an opportunity to sell.

heimidal 9y ago

It's not income if you never exercise the option. Imagine starting as a senior-level manager at a company that's a few years into its life. They provide you with a salary of $150k/year and 100,000 options at $1 with a standard four-year vesting schedule. In the first year, the company's fair market value increases to $2/share. Your tax liability just increased as though you made an extra $25k, so you'll need to come up with ~$8k to cover. If the company sees its value increase 2x per year for all four years, you'll be on the hook for taxes on $675k having only made $600k in actual dollars. Good luck scraping together taxes to cover adjusted income of $525k in year 4 if the company doesn't go public. If the fair market value falls after you vest but before a liquidity event, you never saw a penny of extra liquid assets but still had to pay tens or hundreds of thousands in taxes. This will bankrupt people.

kolbe 9y ago
That sounds no less fair than someone who bought a home for $100k in 1980 who's seen its value appreciate to $5mm, and now has to pay $50k a year in property tax. That sounds no less fair than a family liquidating its estate because they can't afford the estate taxes. That sounds no less fair than a health-conscious person taking care to never drink or do drugs paying 10x more for socialized healthcare to pay for the ailments of an obese alcoholic. I doubt I need to go on, but the point is that taxation sucks. And it's completely hypocritical of someone to want to levy these burdens onto someone else while they themselves become indignant over a tax loophole of theirs being tightened (not even closed). It's even worse that the people who are getting indignant over it are some of the wealthiest in the United States, while at the same time, you want to stick a guy who earns $50k a year with an extra $3k with the ACA. I do admit that the story you provided sounds like it sucks more than average, but in reality, a bank will just give you a loan to cover the taxes. No one is going bankrupt. And if the shares end up going to zero, you get to have capital carryover losses just like everyone else whose investments lost money. But the point is that taxes, when you actually have to get down to it, suck. And if you're being truly democratic, you should try to empathize with all taxpayers in the same way that you think about your own taxes.
- greenleafjacob 9y ago
  You can sell a home to cover property taxes, or even reverse mortgage to get the cash flow. You can't sell private company stock, you can't even encumber it with a lien.

abvdasker 9y ago

RSUs issued by a private company are not income because they are completely illiquid. Taxing RSUs at vest makes no sense because their value could change after they vest but before they are converted to liquid equity. In practice what this means is that maybe you get granted $1 million in RSUs by the private company you work for and pay hundreds of thousands of dollars in taxes. The private company goes bankrupt and never goes public or get acquired and the RSUs become worthless. You don't get those taxes back and you never got the $1 million.

subprotocol 9y ago
THIS. I believe if it goes bankrupt you at least get the taxes back. But not if the company keeps going as a zombie. You end up getting shorted by the company AND Uncle Sam here. These RSUs are called "worse than worthless".

ProblemFactory 9y ago

> why is there such outrage about taxing option and RSU income? There is no outrage, or even opposition to taxing income from selling options and RSUs. The problem arises because in some situations options and RSUs are considered "income" as themselves, not a potential to make income when they are sold. You get some options in an early-stage startup, and have to pay tax on that. But you can't actually sell your options - there is no market, and often you aren't even allowed to sell them before the company is acquired or goes public. There is still a good chance that the company will go bust before either of these happens. So you have to pay a tax bill years before you actually earn income, and potentially without ever earning income from your options.

kolbe 9y ago
Liquidity is not a requirement for a transfer of an asset to be considered income. If your company paid for your apartment, that's income, despite the fact that it may be impossible for you to sublease it. Certainty of future value is not a requirement for something to be considered income. You get paid in dollars all the time, but that's just an asset with fluctuating value. There are several loopholes that get around the definition of income to defer or avoid taxes for certain types of income, but that's exactly what this is: a loophole for the wealthy. And I have no problem with SV employees enjoying tax breaks. I just can't reconcile SV's love of taxing other people, avoiding it for themselves, and still claiming this is a moral, rather than selfish, stance.
- sk5t 9y ago
  You fail to recognize that most options / private company shares are not negotiable or redeemable, period. They cannot be converted to income or other benefit by any mechanism.