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Different situations. If you’re a VC you’re simply buying preferred shares. Shouldn’t be owing anything until you sell. And if your residence for that tax year

by tempsy 6y ago

Different situations. If you’re a VC you’re simply buying preferred shares. Shouldn’t be owing anything until you sell. And if your residence for that tax year is somewhere else I don’t know of any reason why California could claim capital gains tax simply because you invested in a pre-IPO company and selling post IPO. The reason some people are surprised by tax bills when they move is because they vested their shares or options while in California as part of their compensation and then later moved. Logically it makes sense in that situation to owe state taxes on income that you earn in the state you earned it. When you later sell you shouldn’t owe taxes in California if you’re out of state for that tax year.

bourgeoismedia 6y ago
If you held the preferred shares while you were a resident of California, why shouldn't you be subject to California CGT when you realize the gain in proportion to the length of your residency, just like if it were deferred employment compensation (taxed by CA in proportion to workdays in CA vs workdays elsewhere) or real estate (taxed in full by CA)? Why should VCs get a tax preference employees don't get?
- solidsnack9000 6y ago
  Yeah, it's weird that in California that if one does an in-kind transaction to obtain options or shares with labor, it's treated unfavorably relative to a cash transaction for the same things. It's a regressive tax: a special case to tax working people more for gains on equity. The normal way to recognize income on equities is at the time of sale. This is one of a few examples where California's progressive politics haven't lead to progressive policies, whereas states that are much more non-progressive in their politics -- states like Texas -- have, as a practical matter, policies that are much better for working people. I suppose that, hypothetically, when you purchase shares with cash it's "post-tax" cash; whereas when you purchase shares with labor it's "pre-tax" labor.
- tempsy 6y ago
  when you own shares as a VC it’s because you’re an investor. when you receive equity as an employee it is because it’s compensation. when you get equity as an employee you’re taxed when you vest and when you sell. you shouldn’t be taxed when you sell by California if you’re out of state.
solidsnack9000 6y ago
Well, this point specifically applies to options. Per FTB-1004 (https://www.ftb.ca.gov/forms/misc/1004.html https://www.ftb.ca.gov/forms/misc/1004.html) you will be taxed whenever you exercise, whether you're a resident or a non-resident. Doesn't matter if you're out-of-state for a particular tax year. It is not really correct to cast this in terms of owing taxes on income in the state that you earned it because options are not income. There is a non-symmetry here with financial options generally: if you lived in California and bought some options, then left the state, and then, as a non-resident, exercised the options and sold shares, you would not be taxed in California because there was no income in California. Income on a stock transaction is generally recognized at the time a security is sold. Obtaining options and stocks both represent an outflow of money, not an inflow. It's a regressive policy to treat options purchased in-kind with labor in an unfavorable way, with regards to taxation, relative to those purchased with cash.
- tempsy 6y ago
  Ok but tech elite here aka VC investors aren’t getting options when they invest. So this tax question doesn’t apply to them. Rabois can move to Miami now and if he sells his IPO shares next year he owes California nothing.
  - solidsnack9000 6y ago
    Well, VCs do sometimes get options -- that's what convertible debt is. Usually options are not treated as compensation, though. It is likely that Rabois has a mix of compensation from his firm, as a practical matter, and some of it is likely to be options -- but even if not, Rabois and people like him have paid a lot of taxes in California. A lot more than they would have paid in most states. When you consider how much they paid relative to how well the state government has provided services -- taking other states into consideration -- it's hard to see how the people moving are betraying anyone. They paid and paid and paid.

by tempsy 6y ago

bourgeoismedia 6y ago

If you held the preferred shares while you were a resident of California, why shouldn't you be subject to California CGT when you realize the gain in proportion to the length of your residency, just like if it were deferred employment compensation (taxed by CA in proportion to workdays in CA vs workdays elsewhere) or real estate (taxed in full by CA)? Why should VCs get a tax preference employees don't get?

solidsnack9000 6y ago
Yeah, it's weird that in California that if one does an in-kind transaction to obtain options or shares with labor, it's treated unfavorably relative to a cash transaction for the same things. It's a regressive tax: a special case to tax working people more for gains on equity. The normal way to recognize income on equities is at the time of sale. This is one of a few examples where California's progressive politics haven't lead to progressive policies, whereas states that are much more non-progressive in their politics -- states like Texas -- have, as a practical matter, policies that are much better for working people. I suppose that, hypothetically, when you purchase shares with cash it's "post-tax" cash; whereas when you purchase shares with labor it's "pre-tax" labor.
tempsy 6y ago
when you own shares as a VC it’s because you’re an investor. when you receive equity as an employee it is because it’s compensation. when you get equity as an employee you’re taxed when you vest and when you sell. you shouldn’t be taxed when you sell by California if you’re out of state.

solidsnack9000 6y ago

Well, this point specifically applies to options. Per FTB-1004 (https://www.ftb.ca.gov/forms/misc/1004.html https://www.ftb.ca.gov/forms/misc/1004.html) you will be taxed whenever you exercise, whether you're a resident or a non-resident. Doesn't matter if you're out-of-state for a particular tax year. It is not really correct to cast this in terms of owing taxes on income in the state that you earned it because options are not income. There is a non-symmetry here with financial options generally: if you lived in California and bought some options, then left the state, and then, as a non-resident, exercised the options and sold shares, you would not be taxed in California because there was no income in California. Income on a stock transaction is generally recognized at the time a security is sold. Obtaining options and stocks both represent an outflow of money, not an inflow. It's a regressive policy to treat options purchased in-kind with labor in an unfavorable way, with regards to taxation, relative to those purchased with cash.

tempsy 6y ago
Ok but tech elite here aka VC investors aren’t getting options when they invest. So this tax question doesn’t apply to them. Rabois can move to Miami now and if he sells his IPO shares next year he owes California nothing.
- solidsnack9000 6y ago
  Well, VCs do sometimes get options -- that's what convertible debt is. Usually options are not treated as compensation, though. It is likely that Rabois has a mix of compensation from his firm, as a practical matter, and some of it is likely to be options -- but even if not, Rabois and people like him have paid a lot of taxes in California. A lot more than they would have paid in most states. When you consider how much they paid relative to how well the state government has provided services -- taking other states into consideration -- it's hard to see how the people moving are betraying anyone. They paid and paid and paid.