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Joys of the Alternative Minimum Tax. The difference between the exercise and the FMV counts towards your AMT income. (Disclaimer: not advice of any kind)
by mis1988 4y ago
Joys of the Alternative Minimum Tax. The difference between the exercise and the FMV counts towards your AMT income.
(Disclaimer: not advice of any kind)
- konfusinomicon 4y agothe biggest joy is that you get it back in the form of a credit over several years, all the while paying interest and fees on the tax bill you cant initially pay because your "gains" are in a private company's stock that you cant sell! I've yet to get a rational explanation of why the current AMT law is fair. sure for some people it makes sense, but for the exercise of ISOs in a private company, it's basically robbery where they give you a chunk of what they stole back every year, and hopefully a liquidity event comes along sooner rather than later
- tyre 4y agoIt’s fair because otherwise you could compensate people for zero tax. For example, you have a CEO that can either be paid: 1) $1m in cash 2) $1m in stock 3) an option grant to buy 1m shares at $0.000001. Each share has a FMV of $1. Without AMT, you could always take (3) and they would get $1m of stock for $1. Tax free.
- kelnos 4y agoSo what? $1M in stock doesn't pay the rent. They'd still get taxed when they sell the shares.
- ctchocula 4y agoPer Buy, Borrow, Die, they could take a margin loan using that $1M and use borrowed money (say $100K) to pay the rent. With enough accumulated shares, they wouldn't need to sell the shares in their lifetime. After they've passed away, they would pay off the loan and the stock gets a free step up to the appreciated cost basis.
- konfusinomicon 4y agothat's assuming the stock is actually transferable though. that day could never come
- KptMarchewa 4y agoHow would you pay off the loan without selling at least the interest?
- caseysoftware 4y agoWith (3), they'd be taxed on the gains when they sell. Not "tax free" at all. The difference is that they wouldn't be taxed until the gains were realized not when they were imagined on paper.
- tyre 4y agoThe reason we have capital gains is to encourage investment. They're not investing $1 for 1m shares to build something better. They're getting $1m worth of something for $1, risk-free. That gap between strike price and FMV is much more like compensation than it is an investment.
- buryat 4y agoyou can borrow against this asset and get basically a tax-free loan
- KptMarchewa 4y agoCan you _actually_ borrow against completely illiquid, pre-IPO asset?
- konfusinomicon 4y agoexactly this. tax time will come, hopefully. until then it's a tax on monopoly money.
- travem 4y agoDoesn't the option have to match the FMV at the time of issuance? E.g. Option 3 would be Option Grant at FMV of $1 with that constraint
- KptMarchewa 4y agoBut you can't sell those stocks/options/whatever until IPO. If you could I'd not mind.