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There are some exceptions like exercising stock options where you’re taxed for the difference between the strike price and the fair market value at the time of

There are some exceptions like exercising stock options where you’re taxed for the difference between the strike price and the fair market value at the time of exercise (I’m not sure why the law is this way).

Retric 5y ago
Because your trading thing A for thing B. Suppose you could trade stock for a Yacht without income taxes applying. That’s the kind of loophole everyone buying a yacht would use, especially if you could use a near cash equivalent like gold instead of barter. The difference between stock and stock options might not seem like enough to matter, but it’s simply the same generic rule applying.
- fossuser 5y ago
  I'm not sure this follows in the case of options? You have a contract to buy stock at X price. You do this at a discount and get the stock. You could just tax the gain on the stock on its sale with existing tax law and you could do this specifically for options if having some broad law would create weird exceptions like you suggest. ISOs existed to correct for this failure in options, but the income at which AMT removes that protection hasn't been updated substantially since it was created so this protection no longer really covers exercise. I also don't really understand how it could be abused. My change would be to have option exercise pay no tax on the spread, with all taxes payed on gains on sale. As it is, people with massive wealth can exercise when there is no spread (because they have lots of cash already when the shares are granted to them) or they get special early exercise via the 83b election with the IRS and special access from their startup. The people that get hit hardest by this are regular employees starting out that don't have lots of cash to exercise when the spread is zero.
  - Retric 5y ago
    Changing the law would of course change the system but paying people with options has significant economic and political implications. The current solution is for companies to agree to buy back enough shares to cover the tax burden when people exercise their options.
morpheuskafka 5y ago
The difference between the strike price and market price is the value of the option--its the money you otherwise would have had to pay to buy the stock if you didn't have the option. That's why it is so.
- fossuser 5y ago
  So tax the gain on sale of the stock - there's no good reason to tax it on exercise (especially when the stock is illiquid and the price can still go down). The current law is bad imo.

Retric 5y ago

Because your trading thing A for thing B. Suppose you could trade stock for a Yacht without income taxes applying. That’s the kind of loophole everyone buying a yacht would use, especially if you could use a near cash equivalent like gold instead of barter. The difference between stock and stock options might not seem like enough to matter, but it’s simply the same generic rule applying.

fossuser 5y ago
I'm not sure this follows in the case of options? You have a contract to buy stock at X price. You do this at a discount and get the stock. You could just tax the gain on the stock on its sale with existing tax law and you could do this specifically for options if having some broad law would create weird exceptions like you suggest. ISOs existed to correct for this failure in options, but the income at which AMT removes that protection hasn't been updated substantially since it was created so this protection no longer really covers exercise. I also don't really understand how it could be abused. My change would be to have option exercise pay no tax on the spread, with all taxes payed on gains on sale. As it is, people with massive wealth can exercise when there is no spread (because they have lots of cash already when the shares are granted to them) or they get special early exercise via the 83b election with the IRS and special access from their startup. The people that get hit hardest by this are regular employees starting out that don't have lots of cash to exercise when the spread is zero.
- Retric 5y ago
  Changing the law would of course change the system but paying people with options has significant economic and political implications. The current solution is for companies to agree to buy back enough shares to cover the tax burden when people exercise their options.

morpheuskafka 5y ago

The difference between the strike price and market price is the value of the option--its the money you otherwise would have had to pay to buy the stock if you didn't have the option. That's why it is so.

fossuser 5y ago
So tax the gain on sale of the stock - there's no good reason to tax it on exercise (especially when the stock is illiquid and the price can still go down). The current law is bad imo.