46 ms·

This is pretty much what happened to a lot of people in the valley during the dot-com bubble pop - your stock losses could be carried forward until the heat dea

by RyJones 13y ago

This is pretty much what happened to a lot of people in the valley during the dot-com bubble pop - your stock losses could be carried forward until the heat death of the universe, but you paid on 100% of the (illusory) gains.

ChuckMcM 13y ago
I was going to say this exact same thing. I was writing off 'losses' from stock losing value from 2001 to 2012 at $3,000 a year. It would have been longer except that you can, in some cases, offset gains made later against those losses. And yes, all under the auspices of 'alternative minimum tax' for which I have a special place of loathing in my heart for whomever thought that was a good idea.
- loumf 13y ago
  Do you know (remember) the mechanics of how the AMT affected this? Were you given stock that you didn't have a chance to sell? My understanding that only the initial grant of stock and the subsequent selling are taxable -- and didn't realize the AMT affected this.
  - ChuckMcM 13y ago
    Note, the tax code changes every year and I'm not an accountant, just a victim :-) Whenever I have exercised an option, my taxes have included an AMT calculation based on adding in the difference in value between exercise price, and market price, of those options as additional ordinary income. When the AMT tax calculation yields a 'tax owed' number that is larger than the non-AMT version (which it always did when exercising shares to make down payments) the IRS asked for the bigger number. Meaning that even if I had not sold the shares I exercised, the IRS wanted me to pretend that I had and pay tax on that money that I was pretending to have received. In exchange for doing that, the tax basis becomes the market price at the time of exercise. If you don't actually sell the stock (because, for example, you are waiting for escrow to close), and the stock value goes down significantly, you can reach a point that the value of the stock drops below the tax liability you incurred by exercising the stock option in the first place. In some cases the stock can become worthless. (my best score has been $120/share stock going down to $0.52 share) If you realize this is going to happen before the tax year is over you can dump the stock take the loss and it all works out in the wash (loss cancels gain). If you cross over a tax year boundary then you owe the tax anyway (even though you don't have a way to pay it) and when you sell the stock in the following tax year you get a 'loss' but you don't have any gains to offset that against and you can't just take it out of the taxes owed. You can however write it off, $3,000 per year against your ordinary income.
    - itbeho 13y ago
      How would you determine market price for stock options in a startup that's not public yet?
      - loumf 13y ago
        It would not be prudent to exercise options that are not liquid. There is no benefit to doing that. You don't, for example, usually get meaningful voting rights with those shares.
        kalkin 13y ago
        Well, it is not uncommon for options to expire after you leave a company if they are not exercised. So if you take a new job and don't want to throw away your options...
        sokoloff 13y ago
        You might want to exercise options before a new priced round (series B, C, D, etc) or before an S-1 filing. Yes, this exposes you to some adverse treatment (AMT for ISOs, and the risk of paying income tax on shares that later crash or become worthless), but it also establishes an ownership date (for the LTCG holding period) and a basis (which will presumably be higher in the next priced round or IPO, even though they're illiquid now. (And as kalkin observes, if you're leaving the company with in-the-money options.)
      - ChuckMcM 13y ago
        Periodically, the board of directors will go through a process for determining the value (aka the market price) for stock options. If you exercise your option and the exercise price is less than the current valuation price, then you will experience a 'taxable event.' I would guess that you'd be hit with the AMT in the US if computing the tax based on that exercise value was higher than your non-AMT computed tax. But you would want to check with your accountant. Some companies allow you to file an 83b election, which is to exercise all your stock immediately, and as it is worth exactly what you are paying for it, no taxable event, and then take ownership of it as it vests. A person might choose to do that because in the event of going public or any time when the common stock becomes liquid, you would only pay long term capital gains rather than short term gains. The downside is that if the company exits where the common stock is worthless (not an uncommon occurrence for startups) then you would lose that money you paid originally. (but you could write off that loss, $3,000 a year, against future income :-)
loumf 13y ago
Mostly this happened to people that got bad advice (I really hope all of the entrepreneurs reading this site are smarter now). For most, the issue was exercising their options. This is a tax event -- and the tax is owed on the difference in your strike price and the current price of the stock. If you find yourself in this situation -- immediately sell enough stock to cover the tax. If you are given stock -- that is the tax event. You need to have enough cash to cover taxes on stock given to you -- if the stock is illiquid, and this is a bonus or something, then you should ask for part of the bonus to be in cash (to cover tax). If the stock is liquid, immediately sell enough to cover tax. If you are a founder, and your stock just goes up in price, that is not a tax event. Being given at-the-money options is not a tax event. You only owe <s>stock</s> tax once you exercise. IANAA (not an accountant) EDIT: replace "stock" with "tax" in the second to last paragraph
- Anderkent 13y ago
  Doesnt selling stock immediately rather than after a year mean your tax rate on it is higher?
  - thrownaway2424 13y ago
    No, because the exercise is taxed as income at the time of the exercise. If you sell it, there's not _more_ tax to be paid, because your gain after the exercise is zero. If you sell it after some, you'll pay long-term capital gains rates on the delta between your sale price and your exercise price. Exercise-and-hold is a bad idea for most people in most cases.
  - deleted 13y ago
    [deleted]
  - Consultant32452 13y ago
    Generally, yes. Short term capital gains are taxed at a higher rate than long term capital gains.
  - ogreyonder 13y ago
    Yes; for people participating in an employee stock purchase program, it is called a Disqualifying Disposition. It puts you in the short-term capital gains bracket (with about 15% higher tax). However, it's still a VERY good idea to do if you plan on holding stock. I know stories of several people who were exercised options on 7 figures of stock, only to see the price collapse before they were able to sell. The taxes they owed because of that eclipsed their net worth several times over.

by RyJones 13y ago

ChuckMcM 13y ago

I was going to say this exact same thing. I was writing off 'losses' from stock losing value from 2001 to 2012 at $3,000 a year. It would have been longer except that you can, in some cases, offset gains made later against those losses. And yes, all under the auspices of 'alternative minimum tax' for which I have a special place of loathing in my heart for whomever thought that was a good idea.

loumf 13y ago
Do you know (remember) the mechanics of how the AMT affected this? Were you given stock that you didn't have a chance to sell? My understanding that only the initial grant of stock and the subsequent selling are taxable -- and didn't realize the AMT affected this.
- ChuckMcM 13y ago
  Note, the tax code changes every year and I'm not an accountant, just a victim :-) Whenever I have exercised an option, my taxes have included an AMT calculation based on adding in the difference in value between exercise price, and market price, of those options as additional ordinary income. When the AMT tax calculation yields a 'tax owed' number that is larger than the non-AMT version (which it always did when exercising shares to make down payments) the IRS asked for the bigger number. Meaning that even if I had not sold the shares I exercised, the IRS wanted me to pretend that I had and pay tax on that money that I was pretending to have received. In exchange for doing that, the tax basis becomes the market price at the time of exercise. If you don't actually sell the stock (because, for example, you are waiting for escrow to close), and the stock value goes down significantly, you can reach a point that the value of the stock drops below the tax liability you incurred by exercising the stock option in the first place. In some cases the stock can become worthless. (my best score has been $120/share stock going down to $0.52 share) If you realize this is going to happen before the tax year is over you can dump the stock take the loss and it all works out in the wash (loss cancels gain). If you cross over a tax year boundary then you owe the tax anyway (even though you don't have a way to pay it) and when you sell the stock in the following tax year you get a 'loss' but you don't have any gains to offset that against and you can't just take it out of the taxes owed. You can however write it off, $3,000 per year against your ordinary income.
  - itbeho 13y ago
    How would you determine market price for stock options in a startup that's not public yet?
    - loumf 13y ago
      It would not be prudent to exercise options that are not liquid. There is no benefit to doing that. You don't, for example, usually get meaningful voting rights with those shares.
      - kalkin 13y ago
        Well, it is not uncommon for options to expire after you leave a company if they are not exercised. So if you take a new job and don't want to throw away your options...
      - sokoloff 13y ago
        You might want to exercise options before a new priced round (series B, C, D, etc) or before an S-1 filing. Yes, this exposes you to some adverse treatment (AMT for ISOs, and the risk of paying income tax on shares that later crash or become worthless), but it also establishes an ownership date (for the LTCG holding period) and a basis (which will presumably be higher in the next priced round or IPO, even though they're illiquid now. (And as kalkin observes, if you're leaving the company with in-the-money options.)
    - ChuckMcM 13y ago
      Periodically, the board of directors will go through a process for determining the value (aka the market price) for stock options. If you exercise your option and the exercise price is less than the current valuation price, then you will experience a 'taxable event.' I would guess that you'd be hit with the AMT in the US if computing the tax based on that exercise value was higher than your non-AMT computed tax. But you would want to check with your accountant. Some companies allow you to file an 83b election, which is to exercise all your stock immediately, and as it is worth exactly what you are paying for it, no taxable event, and then take ownership of it as it vests. A person might choose to do that because in the event of going public or any time when the common stock becomes liquid, you would only pay long term capital gains rather than short term gains. The downside is that if the company exits where the common stock is worthless (not an uncommon occurrence for startups) then you would lose that money you paid originally. (but you could write off that loss, $3,000 a year, against future income :-)

loumf 13y ago

Mostly this happened to people that got bad advice (I really hope all of the entrepreneurs reading this site are smarter now). For most, the issue was exercising their options. This is a tax event -- and the tax is owed on the difference in your strike price and the current price of the stock. If you find yourself in this situation -- immediately sell enough stock to cover the tax. If you are given stock -- that is the tax event. You need to have enough cash to cover taxes on stock given to you -- if the stock is illiquid, and this is a bonus or something, then you should ask for part of the bonus to be in cash (to cover tax). If the stock is liquid, immediately sell enough to cover tax. If you are a founder, and your stock just goes up in price, that is not a tax event. Being given at-the-money options is not a tax event. You only owe <s>stock</s> tax once you exercise. IANAA (not an accountant) EDIT: replace "stock" with "tax" in the second to last paragraph

Anderkent 13y ago
Doesnt selling stock immediately rather than after a year mean your tax rate on it is higher?
- thrownaway2424 13y ago
  No, because the exercise is taxed as income at the time of the exercise. If you sell it, there's not _more_ tax to be paid, because your gain after the exercise is zero. If you sell it after some, you'll pay long-term capital gains rates on the delta between your sale price and your exercise price. Exercise-and-hold is a bad idea for most people in most cases.
- deleted 13y ago
  [deleted]
- Consultant32452 13y ago
  Generally, yes. Short term capital gains are taxed at a higher rate than long term capital gains.
- ogreyonder 13y ago
  Yes; for people participating in an employee stock purchase program, it is called a Disqualifying Disposition. It puts you in the short-term capital gains bracket (with about 15% higher tax). However, it's still a VERY good idea to do if you plan on holding stock. I know stories of several people who were exercised options on 7 figures of stock, only to see the price collapse before they were able to sell. The taxes they owed because of that eclipsed their net worth several times over.