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These options are effectively "in the money" (whatever the difference is between the low price set for the option and the current higher price is locked-in prof
by lacker 8y ago
These options are effectively "in the money" (whatever the difference is between the low price set for the option and the current higher price is locked-in profit) when issued, have intrinsic value, and should be fully taxable, but you're falsely claiming otherwise.
For what it's worth, options that are not "in the money" are still worth a lot of money and have intrinsic value. I'm not making a ridiculous claim here, this is what the Black Scholes model would say for example and it's why companies don't just hand out options freely to anyone. Yet according to our tax law they do not have value and are not taxable. (This is why options exist in the first place.) So, IMO the whole thing is complicated because the tax law has a somewhat arbitrary rule for determining what options are taxable.
IANAL but it is also not required to give out strike prices that match the exact day someone is hired. You have some flex in the time period. So these rules just aren't as simple as one might hope.
- tptacek 8y agoI guess my argument would just be that it seems pretty clear why it would be shady to go back in time and pick a false issuance date to create the impression that options issued at a higher price were really issued at a lower price in order to lock in untaxable profit.
- lacker 8y agoI used to think that too. But I also thought it would be shady to claim that options had no value when those same options can be traded for money, to lock in an untaxable transfer. That, however, is a key part of how options tax law works. So my current claim is just that intuition is not a good guide to what is or is not legal or ethical for options taxation.
- sulam 8y agoThe IRS thankfully does not use Black Scholes to calculate what I owe taxes on.
- lacker 8y agoWell, if the IRS did it that way, probably nobody would be using stock options in the first place.
- tedunangst 8y agoAn option that is not in the money has no intrinsic value by definition. It has time value.
- deleted 8y ago[deleted]
- lacker 8y agoI don't think it's accurate to say that it has no intrinsic value by definition. If you do a fundamental analysis on the options without reference to their market value, the Black Scholes formula will tell you that an option, even an option out of the money, is worth something. That is the definition of intrinsic value. Options out of the money also clearly have a market value, for public companies at least.
- mrfredward 8y agoIntrinsic value has a very specific meaning in the options world (different from the everyday meaning you are referring to): https://www.investopedia.com/terms/i/intrinsicvalue.asp https://www.investopedia.com/terms/i/intrinsicvalue.asp
- lacker 8y agoAccording to the first sentence in the article you link, "Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, using fundamental analysis." That's precisely what I am talking about.
- mrfredward 8y agoRead more than the first sentence before you double down.
- deleted 8y ago[deleted]