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Got stuck with a huge tax bill on my stock options when Yahoo went under, took 10 years of brutal back to back contracts to pay it off. The state didn't care th

Got stuck with a huge tax bill on my stock options when Yahoo went under, took 10 years of brutal back to back contracts to pay it off. The state didn't care that I had nowhere near the opportunities again they just mercilessly hammered me for taxes until I paid it off a couple years ago but took nearly 15 years to pay off the tax debt and meanwhile I could invest in nothing else.

inscionent 7y ago
That is awful. If you had more money could you have fought it? Was prison threatened?
- Gibbon1 7y ago
  The IRS at least for now doesn't throw people in jail because they can't pay. There aren't enough jails and being in jail negatively impacts ability to pay. Sometimes if the amount is ridiculously out sized compared with ability to pay the IRS will settle for a lower amount. Notable if the IRS ever filed a lien against you: IRS Form 12277 Application for Withdrawal of Filed Form 668.
H8crilA 7y ago
That happened because you exercised and didn't sell? Also, we may be hearing many stories like that after the Bitcoin bubble when IRS goes through the records more carefully. Always remember to take profits the instant you make those profits, put some of that cash aside for yours and IRS's sake. Always.
- seibelj 7y ago
  No, that is nothing like bitcoin. Stock options get exercised at fair market value and you immediately owe taxes on the paper profits, even if you never get a cashout. For example, if your strike is 10 cents and when you finally exercise the FMV of the company is $1 per share, you have 90 cents of profit per share even if the company is still private. Bitcoin is a commodity, if you buy at $10k and the value drops to $5k, you have straight losses. You don’t owe taxes on paper gains unlike the totally ridiculous and insane situation with stock options. The government blows.
  - H8crilA 7y ago
    I meant for people that bought low and then traded around the top. If you switched BTC to, say, ETH around the peak - you created taxable income. Even if you've lost almost everything since then. A buy, full ride up and down to the same level, followed by a sell shouldn't be taxable income.
- kls 7y ago
  Golden rule is if you exercise sell enough immediately to pay off the tax burden. If you have a lockout get it written into your contract that you can sell them to another private holder (e.g another employee, investor). It's legitimate for a private company to want a lockout, they don't want external influence in a company but most will allow internal if you get it in contract.
testfoobar 7y ago
It was rumored that a friend had a $1.5million tax bill on options he had exercised. He apparently held onto his shares riding them down to about about $300K or so in value. Not sure how he resolved it (whether he negotiated his tax bill down with the IRS or came up with a payment plan).
- RantyDave 7y ago
  Isn't this what bankruptcy is for?
  - chrshawkes 7y ago
    Can't file for bankruptcy for taxes due. Nor legal liability (ex. Auto Accident liabilities)
    - mercutio2 7y ago
      You can’t file for bankruptcy within three years of the tax becoming due, but after that, you can have federal income tax obligations discharged in bankruptcy. Unrelated to bankruptcy, ou can also file for an offer in compromise, which collapsing option values or an excellent candidate for.
DanTheManPR 7y ago
I've seen something similar to this in other responses in this thread, how exactly does one get a big tax bill for your stock options while simultaneously not being able to pay them off? I'm not understanding something about the situation.
- ben7799 7y ago
  I mentioned it in my post.. a lot of financial people recommended taking loans to buy stock options. Also in some cases especially with public companies they gifted you the options as income. That got marked as income even if the stock then tanked and you couldn't sell the stock for what the gifted value was. There were various ways to get yourself screwed up.
- testfoobar 7y ago
  Taxes on equity and option grants are complex beasts [ISO/NSO/RSU, Conversions between ISOs to NSOs, Income vs. Cap Gains, AMT, 83(b) elections, Exercised vs Non-exercised, Vesting schedules, etc]. Unless you personally understand the nuances in everyone of these cases, you should 100% work with a tax professional (and if you do understand, you are probably a tax professional!). Here is an earlier discussion on taxes on options: https://news.ycombinator.com/item?id=10020063 https://news.ycombinator.com/item?id=10020063

inscionent 7y ago

That is awful. If you had more money could you have fought it? Was prison threatened?

Gibbon1 7y ago
The IRS at least for now doesn't throw people in jail because they can't pay. There aren't enough jails and being in jail negatively impacts ability to pay. Sometimes if the amount is ridiculously out sized compared with ability to pay the IRS will settle for a lower amount. Notable if the IRS ever filed a lien against you: IRS Form 12277 Application for Withdrawal of Filed Form 668.

H8crilA 7y ago

That happened because you exercised and didn't sell? Also, we may be hearing many stories like that after the Bitcoin bubble when IRS goes through the records more carefully. Always remember to take profits the instant you make those profits, put some of that cash aside for yours and IRS's sake. Always.

seibelj 7y ago
No, that is nothing like bitcoin. Stock options get exercised at fair market value and you immediately owe taxes on the paper profits, even if you never get a cashout. For example, if your strike is 10 cents and when you finally exercise the FMV of the company is $1 per share, you have 90 cents of profit per share even if the company is still private. Bitcoin is a commodity, if you buy at $10k and the value drops to $5k, you have straight losses. You don’t owe taxes on paper gains unlike the totally ridiculous and insane situation with stock options. The government blows.
- H8crilA 7y ago
  I meant for people that bought low and then traded around the top. If you switched BTC to, say, ETH around the peak - you created taxable income. Even if you've lost almost everything since then. A buy, full ride up and down to the same level, followed by a sell shouldn't be taxable income.
kls 7y ago
Golden rule is if you exercise sell enough immediately to pay off the tax burden. If you have a lockout get it written into your contract that you can sell them to another private holder (e.g another employee, investor). It's legitimate for a private company to want a lockout, they don't want external influence in a company but most will allow internal if you get it in contract.

testfoobar 7y ago

It was rumored that a friend had a $1.5million tax bill on options he had exercised. He apparently held onto his shares riding them down to about about $300K or so in value. Not sure how he resolved it (whether he negotiated his tax bill down with the IRS or came up with a payment plan).

RantyDave 7y ago
Isn't this what bankruptcy is for?
- chrshawkes 7y ago
  Can't file for bankruptcy for taxes due. Nor legal liability (ex. Auto Accident liabilities)
  - mercutio2 7y ago
    You can’t file for bankruptcy within three years of the tax becoming due, but after that, you can have federal income tax obligations discharged in bankruptcy. Unrelated to bankruptcy, ou can also file for an offer in compromise, which collapsing option values or an excellent candidate for.

DanTheManPR 7y ago

I've seen something similar to this in other responses in this thread, how exactly does one get a big tax bill for your stock options while simultaneously not being able to pay them off? I'm not understanding something about the situation.

ben7799 7y ago
I mentioned it in my post.. a lot of financial people recommended taking loans to buy stock options. Also in some cases especially with public companies they gifted you the options as income. That got marked as income even if the stock then tanked and you couldn't sell the stock for what the gifted value was. There were various ways to get yourself screwed up.
testfoobar 7y ago
Taxes on equity and option grants are complex beasts [ISO/NSO/RSU, Conversions between ISOs to NSOs, Income vs. Cap Gains, AMT, 83(b) elections, Exercised vs Non-exercised, Vesting schedules, etc]. Unless you personally understand the nuances in everyone of these cases, you should 100% work with a tax professional (and if you do understand, you are probably a tax professional!). Here is an earlier discussion on taxes on options: https://news.ycombinator.com/item?id=10020063 https://news.ycombinator.com/item?id=10020063