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It’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)

by tyre 4y ago

It’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 ago
So what? $1M in stock doesn't pay the rent. They'd still get taxed when they sell the shares.
- ctchocula 4y ago
  Per 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 ago
    that's assuming the stock is actually transferable though. that day could never come
  - KptMarchewa 4y ago
    How would you pay off the loan without selling at least the interest?
caseysoftware 4y ago
With (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 ago
  The 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 ago
  you can borrow against this asset and get basically a tax-free loan
  - KptMarchewa 4y ago
    Can you _actually_ borrow against completely illiquid, pre-IPO asset?
- konfusinomicon 4y ago
  exactly this. tax time will come, hopefully. until then it's a tax on monopoly money.
travem 4y ago
Doesn'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 ago
But you can't sell those stocks/options/whatever until IPO. If you could I'd not mind.

by tyre 4y ago

kelnos 4y ago

So what? $1M in stock doesn't pay the rent. They'd still get taxed when they sell the shares.

ctchocula 4y ago
Per 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 ago
  that's assuming the stock is actually transferable though. that day could never come
- KptMarchewa 4y ago
  How would you pay off the loan without selling at least the interest?

caseysoftware 4y ago

With (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 ago
The 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 ago
you can borrow against this asset and get basically a tax-free loan
- KptMarchewa 4y ago
  Can you _actually_ borrow against completely illiquid, pre-IPO asset?
konfusinomicon 4y ago
exactly this. tax time will come, hopefully. until then it's a tax on monopoly money.

travem 4y ago

Doesn'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 ago

But you can't sell those stocks/options/whatever until IPO. If you could I'd not mind.