4 ms·

Sadly, examples from the dotcom burst and housing crisis abound. It's a double edged sword. I have always preferred to go for early exercising. "Many of these

by pjbk 7y ago

Sadly, examples from the dotcom burst and housing crisis abound. It's a double edged sword. I have always preferred to go for early exercising. "Many of these workers now owe far more in taxes than their stock is worth. Former Cisco engineer Jeffrey Chou, 32, owes $2.5 million in taxes on company stock he purchased last year that has since withered in value. Chou figures that if he were to sell everything he owns, including the three-bedroom Foster City, Calif., townhouse that he shares with his wife and 8-month-old daughter, the family still could not pay the bill." * https://www.chicagotribune.com/sns-tech-taxes-story.html https://www.chicagotribune.com/sns-tech-taxes-story.html

rhizome 7y ago
That sounds like a single-edged sword to me.
ska 7y ago
Hell, plenty examples exists from when the general economy was just fine. Startups are startups.
refurb 7y ago
Jeeze. The IRS must work with you on that, right? Talk about getting screwed!
chii 7y ago
> $2.5 million in taxes on company stock he purchased last year that has since withered in value. but if the stock dropped in value, doesn't the loss in capital offset the taxes? Or has he _already_ paid the taxes, and cannot claw back any losses (since he has to offset those losses on future capital gains from other sources)?
- bm1362 7y ago
  The stock is counted as income when it is exercised. The basis is the strike price then, once you sell later it’s considered either capital gain or loss. My understanding is that you can only apply 3000 in capital loses to income tax liability.
  - sokoloff 7y ago
    You can apply unlimited capital loss against capital gains and then an additional $3K of capital loss against income each year.
  - MAGZine 7y ago
    That is an NSO, not ISO.
- dpiers 7y ago
  That's not how ISOs work. You are taxed on the bargain element (discount to fair value provided by the option) at exercise under AMT, and taxed when you sell under the normal tax rules. Let's say you worked at Uber and you exercised ISOs at the IPO that had appreciated such that the bargain element at exercise was $1,000,000. You would owe 28% Federal + 7% California = $350,000 under AMT (ignoring a lot of other things for simplicity) in April 2020. When you sell your shares, you will be able to reclaim some of this tax through credits for AMT paid in previous years. By the time the employee lockup expired in November 2019, the shares are trading 43% lower than the price you exercised at and are only worth ~$577K. You still have a $350K tax bill under AMT due in April 2020. Because you exercised in 2019, you have an out - by selling the shares in a the same calendar year, you can lower the basis under AMT, but you give up the ability to pay long term capital gains rates on the sale (0-25% fed + 0-13.3% CA) and instead pay ordinary income tax rates (22-43% fed + 0-13.3% CA). Let's just say it would be 40% - you could reduce your tax bill to $231K by selling all of your shares. You have until the employee trading window closes in mid-December to decide whether to hold onto your shares for the eventual preferential tax treatment, hoping they recover before the tax bill ruins you, or to double your tax rate to save money on taxes this year. Now, the benefit of hindsight: If you had sold all of your shares, you would have missed out on $330K in gains in the following 60 days. If you held all of your shares, you are still facing a hefty AMT bill and years of careful tax planning to reclaim the AMT credits you generated. Oh, and even if the shares 10x in value, you are still going to have >$100K in AMT credits that will probably take 10+ years to recover.
  - henrikschroder 7y ago
    This is absolutely crazy. I remember this exact thing happening to people in the dotcom era, they got taxed on gains that they were completely unable to realize. If I understand it correctly, the problem here is the lockup period? If you get options that you are guaranteed that you can sell immediately after exercising them, you should be good, right? Then the proper course of action is to exercise all you can, sell enough to cover your tax liability, and then do as you please with the rest, keep, sell, whatever. But if you can't sell them on the exercise date, you have to start thinking about the bullshit you just described above, right?
- treis 7y ago
  >but if the stock dropped in value, doesn't the loss in capital offset the taxes? Or has he _already_ paid the taxes, and cannot claw back any losses (since he has to offset those losses on future capital gains from other sources)? It's the second. But someone getting 7 million in stock options should still be making bank somewhere and can probably offset it in the future. He's not really in that big of a pickle. Ultimately he will work out a payment plan with the IRS and pay it off over a few years. He's also just an idiot. He should have sold enough stock to cover his taxes when he exercised the options. The people that get really screwed are those exercising options into illiquid companies. They may be paper millionaires as relatively junior engineers and have big tax bills. Then the company goes tits up and they lose everything without a reasonable expectation of future income high enough to offset their paper loss.
  - thaumasiotes 7y ago
    >> Or has he _already_ paid the taxes, and cannot claw back any losses (since he has to offset those losses on future capital gains from other sources)? > It's the second. No, it isn't? It can't be, because he's saying he can't pay the taxes. If he'd already paid them, they would already be paid.
    - sokoloff 7y ago
      I’m not familiar with his specific case, but it sounds likely that he’s already incurred the taxes but not yet paid them.

by pjbk 7y ago

rhizome 7y ago

That sounds like a single-edged sword to me.

ska 7y ago

Hell, plenty examples exists from when the general economy was just fine. Startups are startups.

refurb 7y ago

Jeeze. The IRS must work with you on that, right? Talk about getting screwed!

chii 7y ago

> $2.5 million in taxes on company stock he purchased last year that has since withered in value. but if the stock dropped in value, doesn't the loss in capital offset the taxes? Or has he _already_ paid the taxes, and cannot claw back any losses (since he has to offset those losses on future capital gains from other sources)?

bm1362 7y ago
The stock is counted as income when it is exercised. The basis is the strike price then, once you sell later it’s considered either capital gain or loss. My understanding is that you can only apply 3000 in capital loses to income tax liability.
- sokoloff 7y ago
  You can apply unlimited capital loss against capital gains and then an additional $3K of capital loss against income each year.
- MAGZine 7y ago
  That is an NSO, not ISO.
dpiers 7y ago
That's not how ISOs work. You are taxed on the bargain element (discount to fair value provided by the option) at exercise under AMT, and taxed when you sell under the normal tax rules. Let's say you worked at Uber and you exercised ISOs at the IPO that had appreciated such that the bargain element at exercise was $1,000,000. You would owe 28% Federal + 7% California = $350,000 under AMT (ignoring a lot of other things for simplicity) in April 2020. When you sell your shares, you will be able to reclaim some of this tax through credits for AMT paid in previous years. By the time the employee lockup expired in November 2019, the shares are trading 43% lower than the price you exercised at and are only worth ~$577K. You still have a $350K tax bill under AMT due in April 2020. Because you exercised in 2019, you have an out - by selling the shares in a the same calendar year, you can lower the basis under AMT, but you give up the ability to pay long term capital gains rates on the sale (0-25% fed + 0-13.3% CA) and instead pay ordinary income tax rates (22-43% fed + 0-13.3% CA). Let's just say it would be 40% - you could reduce your tax bill to $231K by selling all of your shares. You have until the employee trading window closes in mid-December to decide whether to hold onto your shares for the eventual preferential tax treatment, hoping they recover before the tax bill ruins you, or to double your tax rate to save money on taxes this year. Now, the benefit of hindsight: If you had sold all of your shares, you would have missed out on $330K in gains in the following 60 days. If you held all of your shares, you are still facing a hefty AMT bill and years of careful tax planning to reclaim the AMT credits you generated. Oh, and even if the shares 10x in value, you are still going to have >$100K in AMT credits that will probably take 10+ years to recover.
- henrikschroder 7y ago
  This is absolutely crazy. I remember this exact thing happening to people in the dotcom era, they got taxed on gains that they were completely unable to realize. If I understand it correctly, the problem here is the lockup period? If you get options that you are guaranteed that you can sell immediately after exercising them, you should be good, right? Then the proper course of action is to exercise all you can, sell enough to cover your tax liability, and then do as you please with the rest, keep, sell, whatever. But if you can't sell them on the exercise date, you have to start thinking about the bullshit you just described above, right?
treis 7y ago
>but if the stock dropped in value, doesn't the loss in capital offset the taxes? Or has he _already_ paid the taxes, and cannot claw back any losses (since he has to offset those losses on future capital gains from other sources)? It's the second. But someone getting 7 million in stock options should still be making bank somewhere and can probably offset it in the future. He's not really in that big of a pickle. Ultimately he will work out a payment plan with the IRS and pay it off over a few years. He's also just an idiot. He should have sold enough stock to cover his taxes when he exercised the options. The people that get really screwed are those exercising options into illiquid companies. They may be paper millionaires as relatively junior engineers and have big tax bills. Then the company goes tits up and they lose everything without a reasonable expectation of future income high enough to offset their paper loss.
- thaumasiotes 7y ago
  >> Or has he _already_ paid the taxes, and cannot claw back any losses (since he has to offset those losses on future capital gains from other sources)? > It's the second. No, it isn't? It can't be, because he's saying he can't pay the taxes. If he'd already paid them, they would already be paid.
  - sokoloff 7y ago
    I’m not familiar with his specific case, but it sounds likely that he’s already incurred the taxes but not yet paid them.