4 ms·

No, it isn't what it was made for. You're limited to a $2000 contribution. Claiming that the value of a share of PayPal was 1/10 of a cent was nonsense. He f

by not2b 5y ago

No, it isn't what it was made for. You're limited to a $2000 contribution. Claiming that the value of a share of PayPal was 1/10 of a cent was nonsense. He found a loophole, sure, but it's morally fraudulent even if legally allowed. To close the loophole, putting private shares into a Roth IRA should be banned because they have no true market price that indicates their worth.

bklyn11201 5y ago
Precisely. Was anyone else allowed to buy Paypal shares at 1/10 of a cent in 1999? If he alone marked this price, how would it not be fraudulent?
- jandrese 5y ago
  He basically bought those shares from himself, which is why he was able to set the price arbitrarily low. The point of the Roth IRA is to encourage middle and lower class people to invest in their retirement by offering a tax incentive. But to avoid being abused by the rich the total yearly contribution limit is set very low. Thiel avoided this limit by simply selling himself a huge amount of stock for fractions of a penny on the dollar, knowing the actual price on the open market would be far higher. However, nobody can prove that the price of the private share would have been higher at the time because they weren't on a market. It would be like if you were trying to avoid taxes by selling your 1,000 acre mansion to a LLC that you own for $1 and paying the tax on that $1. This doesn't work for real estate, but the Roth IRA system is not as sophisticated so you can get away with it.
icedchai 5y ago
$2000 hasn't been the contribution limit for almost 20 years. It's $6K now, but we could argue that it's still not enough. Private companies that are raising money have a valuation on them done periodically ("409A valuation"), and this is what private stock options and common shares are based on. This is the IRS's own rules.
silicon2401 5y ago
> He found a loophole, sure, but it's morally fraudulent even if legally allowed. Morality is relative. You can't legally police other people based on your personal morality. To me, morality is maximizing your self-benefit, so there's nothing wrong with what Thiel did. If other people disagree, then there are plenty of avenues to campaign for outlawing what he did.
iammisc 5y ago
> it's morally fraudulent even if legally allowed Can you detail the immorality? > To close the loophole, putting private shares into a Roth IRA should be banned because they have no true market price that indicates their worth. Why should they be banned? Everything has a price. IIRC, in a self-directed IRA you can put anything... paintings, gold, collectibles, houses. Why not random shares? I see a huge problem here. Roth IRAs were made with certain guarantees. That some people would make outsized returns in a country of almost 400 million should be expected. Why do we find it necessary to then go and 'get our fair share'? Didn't we already set the rules? Why must we now change them since some guy got lucky? Ideally, we should just say 'good job Mr Thiel', you held up your end of the bargain and we'll hold up ours. The deal was already struck. This is why no one trusts the American government. Also, I'd point out that the roth IRA mentioned here is only nominally worth $5b. If he were to sell all the shares there would likely be a huge drop in price. Either way, what goes unmentioned is that the $5b wouldn't be taxed anyway if it was all in unrealized capital gains.
- zajd 5y ago
  Imagine being this dumb
- not2b 5y ago
  The transaction was dishonest from day one. Those shares were worth more than 1/10th of a cent each. Had he offered to sell them at that point (if he were willing to do so and legally allowed) he would have gotten far more than that. He (rather, the company that he controlled) just declared a value by fiat. The stock had no true market price because there was no market: at that point, the shares could not be sold to outsiders, so there were no willing buyers or sellers to set a price.
vmception 5y ago
lol, 22 years late with a knee jerk reaction of trying to change that specific law I love how this approach will just leave you surprised in the 2040s about what anybody with reading comprehension skills is doing in 2021
- dang 5y ago
  Please don't be an asshole on HN, no matter how uninformed someone else is or you feel they are. It only makes things worse. https://news.ycombinator.com/newsguidelines.html https://news.ycombinator.com/newsguidelines.html
s1artibartfast 5y ago
>Claiming that the value of a share of PayPal was 1/10 of a cent was nonsense. It was the valuation at the time and there is nothing illegal about that. You can invest your Roth in penny stocks or sub penny stocks today if you want. The real question is if it was legal to purchase stocks in a company he also managed.
- medvezhenok 5y ago
  The only way that was a true valuation of the shares at the time would be if he were willing to sell those shares to someone else at that price ($0.001) at the end of 1999. If not, that's not true value, that's just accounting fraud. For a valuation, there has to be a market and a market clearing price. If there is no market (no buyers and sellers), valuation is meaningless.
  - s1artibartfast 5y ago
    That's not how tax law works. When you found a company you buy founder's stock, with an initial valuation filed with the IRS and this is the value until the next qualified valuation event, where it may change. Share prices of $0.01 to $0.00001 are common. I guarantee that $0.001 was the founders share price filed with the IRS at company formation. https://gust.com/launch/blog/how-to-value-startup-stock https://gust.com/launch/blog/how-to-value-startup-stock
    - machinebun 5y ago
      Sure, $0.001 is the value on paper (and under current law). The point is, it's exploitable (let's say I'm an Apple engineer, I start a new company and get a wink wink from some friends in high places who want to invest in my company doing X. I put in my founders stock into IRA in return for first dibs on placement for the investor - 1 year later company has valuation, my stock has risen many %%. Sure, I'm technically doing everything legally, but practically it's somewhat equivalent to insider trading + avoids taxes). I would personally ban non-public investments in Roth IRAs. That way a debate about market value doesn't have to happen.
vmception 5y ago
I dont find this to be a loophole, you just werent aware of it. A plain reading of the tax code would make that possibility fairly obvious. This approach will just leave you surprised in the 2040s about what anybody with reading comprehension skills is doing in 2020s. Also greater private equity access was just expanded in the tax code for tax deferred roth products. So the opposite is happening.

by not2b 5y ago

bklyn11201 5y ago

Precisely. Was anyone else allowed to buy Paypal shares at 1/10 of a cent in 1999? If he alone marked this price, how would it not be fraudulent?

jandrese 5y ago
He basically bought those shares from himself, which is why he was able to set the price arbitrarily low. The point of the Roth IRA is to encourage middle and lower class people to invest in their retirement by offering a tax incentive. But to avoid being abused by the rich the total yearly contribution limit is set very low. Thiel avoided this limit by simply selling himself a huge amount of stock for fractions of a penny on the dollar, knowing the actual price on the open market would be far higher. However, nobody can prove that the price of the private share would have been higher at the time because they weren't on a market. It would be like if you were trying to avoid taxes by selling your 1,000 acre mansion to a LLC that you own for $1 and paying the tax on that $1. This doesn't work for real estate, but the Roth IRA system is not as sophisticated so you can get away with it.

icedchai 5y ago

$2000 hasn't been the contribution limit for almost 20 years. It's $6K now, but we could argue that it's still not enough. Private companies that are raising money have a valuation on them done periodically ("409A valuation"), and this is what private stock options and common shares are based on. This is the IRS's own rules.

silicon2401 5y ago

> He found a loophole, sure, but it's morally fraudulent even if legally allowed. Morality is relative. You can't legally police other people based on your personal morality. To me, morality is maximizing your self-benefit, so there's nothing wrong with what Thiel did. If other people disagree, then there are plenty of avenues to campaign for outlawing what he did.

iammisc 5y ago

> it's morally fraudulent even if legally allowed Can you detail the immorality? > To close the loophole, putting private shares into a Roth IRA should be banned because they have no true market price that indicates their worth. Why should they be banned? Everything has a price. IIRC, in a self-directed IRA you can put anything... paintings, gold, collectibles, houses. Why not random shares? I see a huge problem here. Roth IRAs were made with certain guarantees. That some people would make outsized returns in a country of almost 400 million should be expected. Why do we find it necessary to then go and 'get our fair share'? Didn't we already set the rules? Why must we now change them since some guy got lucky? Ideally, we should just say 'good job Mr Thiel', you held up your end of the bargain and we'll hold up ours. The deal was already struck. This is why no one trusts the American government. Also, I'd point out that the roth IRA mentioned here is only nominally worth $5b. If he were to sell all the shares there would likely be a huge drop in price. Either way, what goes unmentioned is that the $5b wouldn't be taxed anyway if it was all in unrealized capital gains.

zajd 5y ago
Imagine being this dumb
not2b 5y ago
The transaction was dishonest from day one. Those shares were worth more than 1/10th of a cent each. Had he offered to sell them at that point (if he were willing to do so and legally allowed) he would have gotten far more than that. He (rather, the company that he controlled) just declared a value by fiat. The stock had no true market price because there was no market: at that point, the shares could not be sold to outsiders, so there were no willing buyers or sellers to set a price.

vmception 5y ago

lol, 22 years late with a knee jerk reaction of trying to change that specific law I love how this approach will just leave you surprised in the 2040s about what anybody with reading comprehension skills is doing in 2021

dang 5y ago
Please don't be an asshole on HN, no matter how uninformed someone else is or you feel they are. It only makes things worse. https://news.ycombinator.com/newsguidelines.html https://news.ycombinator.com/newsguidelines.html

s1artibartfast 5y ago

>Claiming that the value of a share of PayPal was 1/10 of a cent was nonsense. It was the valuation at the time and there is nothing illegal about that. You can invest your Roth in penny stocks or sub penny stocks today if you want. The real question is if it was legal to purchase stocks in a company he also managed.

medvezhenok 5y ago
The only way that was a true valuation of the shares at the time would be if he were willing to sell those shares to someone else at that price ($0.001) at the end of 1999. If not, that's not true value, that's just accounting fraud. For a valuation, there has to be a market and a market clearing price. If there is no market (no buyers and sellers), valuation is meaningless.
- s1artibartfast 5y ago
  That's not how tax law works. When you found a company you buy founder's stock, with an initial valuation filed with the IRS and this is the value until the next qualified valuation event, where it may change. Share prices of $0.01 to $0.00001 are common. I guarantee that $0.001 was the founders share price filed with the IRS at company formation. https://gust.com/launch/blog/how-to-value-startup-stock https://gust.com/launch/blog/how-to-value-startup-stock
  - machinebun 5y ago
    Sure, $0.001 is the value on paper (and under current law). The point is, it's exploitable (let's say I'm an Apple engineer, I start a new company and get a wink wink from some friends in high places who want to invest in my company doing X. I put in my founders stock into IRA in return for first dibs on placement for the investor - 1 year later company has valuation, my stock has risen many %%. Sure, I'm technically doing everything legally, but practically it's somewhat equivalent to insider trading + avoids taxes). I would personally ban non-public investments in Roth IRAs. That way a debate about market value doesn't have to happen.

vmception 5y ago

I dont find this to be a loophole, you just werent aware of it. A plain reading of the tax code would make that possibility fairly obvious. This approach will just leave you surprised in the 2040s about what anybody with reading comprehension skills is doing in 2020s. Also greater private equity access was just expanded in the tax code for tax deferred roth products. So the opposite is happening.