No. His stock was near zero when he acquired (created) them. He'll pay full cap gain rates when he realizes them (which is 15% cap gains rate which is not too bad for him; I pay a lot more on my labor gains). He owes no tax until then. If you received stock worth , say, one million , you might want to sell 1/3 to pay the tax. Otherwise if stock price goes to zero you've got a million in losses to write off which is hard to do without a million in gains to offset it.
…15% cap gains rate which is not too bad for him; I pay a lot more on my labor gains
For people that feel that the capital gains crowd gets special treatment…
How would you be with waiting 8 years for each paycheck, or being paid now in 2004 dollars ( paid 82 cents for each dollar you earn)?
Part of the long term capital gains reduction is a crude compensation for inflation. In this case it fails miserably because of the ludicrous ratio between profit and investment, but in the more normal case where you might make 40% while inflation came up 25% it achieves a sort of balance between tax and inflation's erosion of capital.
I would be delighted to pay 15+18=33percent instead of the 35% income tax rate. And are capital gains subject to the other 1% tax for FICA? And not all capital gains wait 8 or more years. And if I manage to save a bit of my salary, the government doesn't give me an inflation-protected savings account.
That's only partly true. As I recall, he exercised a substantial option (~100 million shares or something like that), half of which were non-qualified and are immediately taxed as ordinary income, so he's got a big tax bill coming and probably will keep less than half of what he just cashed out.
(EDIT: I don't know anything about this subject, the below is only a naive question. See response.)
are you sure about this. to me it's pretty obvious that if you receive a million dollars in stocks and, say, 48 hours later it goes to 0, then insofar as you owed taxes on the million due immediately, you have also just lost a million in taxable income; so you write the million loss off of the million in gains for net 0 increase or decrease in your taxable amount due to this gain-and-loss.
I know the IRS can be daft, but surely if you lose the exact amount you just got, then you've just netted nothing, taxable at your marginal tax rate on that gain for that type of gain, times nothing = nothing.
Wow. All I can say is, "Are you sure?" How was it "your choice to let the bet ride." I mentioned a very short window - what if you were hospitalized between receiving the security and being able to dispose of it because you didn't want to keep it?
How can a type of income possibly be in a different bucket from loss of that very type of income?
The example you gave is pretty unlikely: (a) someone gives you a million dollars in stock and (b) you didn't know that was coming to prepare for it and (c) the stock immediately goes to 0 before you can sell it. Just noting that.
Still, this would likely end up in separate buckets. Someone giving you a million dollars in stock very likely counts as income, not capital gains. You'll have a tax liability for $1MM in income. Then, should it actually go to zero, you've got a $1MM capital loss. In general, capital losses are not fully deductible against income, only capital gains. I hope you also had a $1MM capital gain so you can do something with the loss...
But again, this case is pretty contrived. Likely if you're getting a large amount of stock like in this example, you know it's coming, and can decide what to do about it before it suddenly goes to 0. (Hint: holding onto it is deciding to let it ride.)
How can this possibly be what the tax code says? It just is.
To prevent this problem you exercise your options and sell stock at the same time.
Lets say you have 10,000 options with a strike price of $1 and the stock is trading at $11.
Instead of sending a check for $10,000 to the broker and receiving the stock, you tell them to sell 3,000 options for $33,000, have them keep $10,000 to pay for the options and send $23,000 to the IRS.
It's not so simple as a magic section; AMT may or may not apply.
If you got the stock as a gift, or (more likely in this startup context) an RSU grant, the entire value is taxed as ordinary income at the time you receive the shares. I don't think there's any special AMT treatment here.
If you purchased the stock using NQOs (non-qualified options), the difference between the strike price and fair market value is taxed as ordinary income at the time of purchase, and again I don't think there's any special AMT treatment.
If you purchased the stock using ISOs (incentive stock options), then you have to watch out for AMT -- under normal rules, you don't owe tax at time of purchase, and when you sell, if you held long enough, the gain from strike price to FMV at purchase time may be taxed as capital gains. But under AMT rules, the purchase is a taxable event, and you may owe tax at exercise time.
Under any of these, if you exercise (or are gifted) shares and hold them and they decline, you may end up owing taxes on the higher on-paper value that never meant real money to you, and this ends up feeling unfair. But this case is generally obvious enough you would see it coming, except in the ISO+AMT case which is much less obvious, and this difference is what screwed a lot of people in the 2000-era bubble burst.
Normal disclaimer: I'm not a lawyer or accountant, there are many more details that apply here, and you need to figure out what applies to you before making any important decisions. But I believe the above is basically true.
It's not unprecedented for tax liabilities to be waived in extreme circumstances, but just not understanding what was going on isn't an extreme circumstance.
A lot of people got screwed badly by this during the dot-com boom/bust, and it did lead to changes in how startups grant ordinary employees equity.
If you're ever in the situation of being given stock or options and you're not 100% sure of the implications, TALK TO AN ACCOUNTANT IMMEDIATELY.
Depends on the details, but they may be in different buckets that you can't use to offset each other. Exercising the options is probably ordinary income, which can only be offset to $3k with short term capital losses.
wow. You could really fuck someone over by giving them something worth much more than their net worth and making sure it's damaged to worthlessness shortly thereafter.
That would generally be some variety of fraud. You can sue for damages, and there are tax laws and regulations dealing with losses due to bad acts like that.
