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That's the hazard of Section 83. You greatly minimize your tax exposure if the stock increases in value, but you take a wash if it sinks. If you didn't want t

by rprasad 14y ago

That's the hazard of Section 83. You greatly minimize your tax exposure if the stock increases in value, but you take a wash if it sinks. If you didn't want to take the risk of a loss, you should not have elected into Section 83.

beagle3 14y ago
> If you didn't want to take the risk of a loss, you should not have elected into Section 83. tl;dr: I did not do a 83(b) election. Never assume you know how taxes work, almost no one does. I invested in a company, as in, paid cash for preferred shares. That company was later acquired, in a stock+cash deal, mostly stock. The way the tax code works, I realized the gain on the day the deal went through. assume 5x short term gain in NY or CA: That's ~50% tax on the gain, or 2x in taxes ON THE DAY OF THE DEAL. but .. there's rule 144; I didn't pay for the acquiring company's stock - I was given them in exchange for the acquired company stock. So I have to wait 6 months to sell them. During these 6 months, the acquiring company tanks 60%. My 5x (for which I already paid 1x) is now worth 2x, which I already paid in taxes -- I've lost all of my gains, and my initial investment. Again: I paid 1x originally + 2x in taxes, and now hold something worth 2x in my hands, for a net of -1x, on a successful investment! Here's where the magic of dates come into play: if the deal goes through in jan-june, 6 month lockup ends within the same calendar year, and you can net the profit and loss. Which happened, luckily for me. If it is in jul-dec, you can't. The acquiring company was 100 times larger than the company I invested in, and I was a minority investor there. Other than making the initial investment, I had absolutely no say about any deal -- the first time I could do anything was 6 months after the deal date, at which point I had already suffered all the consequences. edit: corrected the math. clarification: the numbers are not factual from my case. I actually ended with a modest 0.3x post-tax profit, everything taken into account (on a 5x acquisition!). The deal was very complex - the example I gave here makes it easier to understand.
- deleted 14y ago
  [deleted]
- fpgeek 14y ago
  From what I recall, the losses are as real as the taxes. Even if you hadn't been able to net them off now they (in theory) reduce your future tax liability. Of course, generally speaking it is unlikely to end up applying those losses to income taxed at that high a rate. And there are former coworkers of mine (who lost badly trying to hold onto ISOs) that refer to capital-loss carry-forwards that their children will inherit. Nevertheless, the reality is at least the tiniest bit less bad than it sounds.
  - beagle3 14y ago
    > And there are former coworkers of mine (who lost badly trying to hold onto ISOs) that refer to capital-loss carry-forwards that their children will inherit. IIRC, there's a 7 year limit of how long you can carry capital losses - though there might be some way around that.... > Nevertheless, the reality is at least the tiniest bit less bad than it sounds. It is, for an investor who invests regularly, and a positive overall result - these things will cancel out. If you don't have a good investment opportunity every 3-5 years, it's basically as bad as I described. Small time investors (in my case, this was an investment in a friend's business), employees and entrepreneurs are worse off, although professional investors are, in fact, reasonably out of tax harm's way in this sense.

by rprasad 14y ago

beagle3 14y ago

> If you didn't want to take the risk of a loss, you should not have elected into Section 83. tl;dr: I did not do a 83(b) election. Never assume you know how taxes work, almost no one does. I invested in a company, as in, paid cash for preferred shares. That company was later acquired, in a stock+cash deal, mostly stock. The way the tax code works, I realized the gain on the day the deal went through. assume 5x short term gain in NY or CA: That's ~50% tax on the gain, or 2x in taxes ON THE DAY OF THE DEAL. but .. there's rule 144; I didn't pay for the acquiring company's stock - I was given them in exchange for the acquired company stock. So I have to wait 6 months to sell them. During these 6 months, the acquiring company tanks 60%. My 5x (for which I already paid 1x) is now worth 2x, which I already paid in taxes -- I've lost all of my gains, and my initial investment. Again: I paid 1x originally + 2x in taxes, and now hold something worth 2x in my hands, for a net of -1x, on a successful investment! Here's where the magic of dates come into play: if the deal goes through in jan-june, 6 month lockup ends within the same calendar year, and you can net the profit and loss. Which happened, luckily for me. If it is in jul-dec, you can't. The acquiring company was 100 times larger than the company I invested in, and I was a minority investor there. Other than making the initial investment, I had absolutely no say about any deal -- the first time I could do anything was 6 months after the deal date, at which point I had already suffered all the consequences. edit: corrected the math. clarification: the numbers are not factual from my case. I actually ended with a modest 0.3x post-tax profit, everything taken into account (on a 5x acquisition!). The deal was very complex - the example I gave here makes it easier to understand.

deleted 14y ago
[deleted]
fpgeek 14y ago
From what I recall, the losses are as real as the taxes. Even if you hadn't been able to net them off now they (in theory) reduce your future tax liability. Of course, generally speaking it is unlikely to end up applying those losses to income taxed at that high a rate. And there are former coworkers of mine (who lost badly trying to hold onto ISOs) that refer to capital-loss carry-forwards that their children will inherit. Nevertheless, the reality is at least the tiniest bit less bad than it sounds.
- beagle3 14y ago
  > And there are former coworkers of mine (who lost badly trying to hold onto ISOs) that refer to capital-loss carry-forwards that their children will inherit. IIRC, there's a 7 year limit of how long you can carry capital losses - though there might be some way around that.... > Nevertheless, the reality is at least the tiniest bit less bad than it sounds. It is, for an investor who invests regularly, and a positive overall result - these things will cancel out. If you don't have a good investment opportunity every 3-5 years, it's basically as bad as I described. Small time investors (in my case, this was an investment in a friend's business), employees and entrepreneurs are worse off, although professional investors are, in fact, reasonably out of tax harm's way in this sense.