
What would the taxes be if I exercise my startup options? - itsjaredc
https://medium.com/@jaredcohe/what-are-my-taxes-if-i-exercise-my-startup-options-1a36e0c3b401#.tzzg52o1b
======
logfromblammo
I can hear all the non-US persons reading this article and laughing about all
the insane idiocy that we put up with from the US tax code and IRS.

All US persons have to put up with at least this amount of calculation _every
year_ (otherwise pay more than is strictly necessary, or possibly suffer
penalties and fines later), and the details constantly change with the
political tides.

This is why tax reform crops up as an issue every 4 years, though it somehow
never manages to survive past primary season to the general election.

~~~
cgearhart
Tax reform never survives because there is no consensus on how it should be
fixed. Some folks think we should "simplify" by eliminating deductions -
things like home mortgage interest, child care expenses, medical expenses &
health insurance premiums. Other folks think we should "simplify" by
eliminating corporate tax breaks & subsidies, and change how we tax things
like stock trades & financial instruments. Still others think we should scrap
the whole system and just impose a flat tax. Everyone benefits a little under
the current system, and no one wants to trade the devil in the details of a
"reformed" system for the deal they've got now.

The ideas that are tenable can't be popular enough to succeed (since we're all
just temporarily disenfranchised millionaires, and it could always be worse),
and the ones that are simplest aren't palatable once all the details are
worked out. So we do nothing, because that's easy.

~~~
logfromblammo
Here's an idea on how to simplify.

The IRS sends you a summary from all your various W-2s and 1099s for the year.
It has two numbers: what you earned as income, and how much you already paid
for income tax this year.

And it sends you your tax form. If you earned less than the median annual
income for this year, you owe zero. If you paid anything already, you get all
of it back with the enclosed check.

If you earned more, you see the result of the automatic calculation, such as
tax( income ) = max( income - median_income, 0 ) x tax_rate . That's an
easily-calculated, slightly-progressive income tax, with only three
computation steps. If you paid more than what you owe, you get a refund.
Otherwise, you could, at that point, file the forms for additional
politically-motivated deductions or credits, or just pay the difference and be
done.

This has the notable advantage, thanks to using the single, easily-determined
statistic of median income, of cutting the number of tax filers in half--
specifically the half that would otherwise pay the least amount in tax. And
that half can gleefully vote for the reform! Them along with the median-plus-
one person constitute a simple majority in favor.

Anyone can sit down and come up with a better way to collect income tax from
the perspective of the tax-payers. Anyone. Yes, even that guy. The problem is
that the tax-payer perspective is not a factor when it comes to
implementation. At that point, it is the perspective of the tax- _collectors_
that matters. And from the perspective of the collectors, a system that
offloads all the work onto the payers, and where any mistake at all could
generate more tax revenue, is simply perfect. And the more confusing, the
better, because unclaimed deductions increase revenue, and honest mistakes
generate penalties.

~~~
gohrt
you are describing the 1040EZ which approximately already works as you
described, for low-income wage-earners.

People who have stocks and mortgages and etc -- non-wage income and
deductions, have to go through a more complicated process.

~~~
logfromblammo
If you think the 1040EZ filing process is in any way similar to what I
attempted to describe, I fear that my description was grossly inadequate.

------
bmcfeeley
How concerned should I be about my employer (sizable company, ~300 employees)
being reticent to divulge our 409A valuation with me? I've had a hard time
(read: never did get; only got my options' fractional ownership in percentage
terms after long nagging email chains) in the past getting any information to
this effect, and we just raised another round a few months back, so I would
like to estimate my tax burden, but they don't seem keen on sharing.

~~~
toast0
If you're eligible to exercise any options, I would be concerned; you can't
make an informed decision without knowing the tax consequences. You might want
to phrase it as you'd like to exercise some options, but you need to know the
409a valuation so you know how much AMT you can afford.

If you're not yet vested and there's no early exercise provision, you don't
need to be super concerned, since you can't take any action anyway; but I
would be sure you're getting the compensation that you want in a form you can
value (salary).

~~~
shostack
Would I be accurate in restating your last point as "if they won't tell you
what the shares are valued at or how big the pool is, and they just give you a
percentage, you have no clue how much the equity is actually worth?"

~~~
toast0
Yes, exactly.

------
WalterBright
If they're worth any real money, you need to consult a CPA, not get advice on
the internet. Following bad advice can cost you plenty.

------
delinka
I recently talked to a CFO who put it like this:

 _For the sake of planning_ : The difference between what you paid (you have
to exercise options for this to matter) for your shares and what the are worth
(see the company's most recent valuation) is counted as income for the current
tax year.

If you hold the shares for more than a year, the money you make on a sale is
subject to capital gains tax. This is indeed affected by WHEN you buy shares,
so make sure to take monthly purchases (if you vest monthly) into account.

 _When you file your taxes_ : Hire someone; don't try to do this yourself.

~~~
schmichael
I hired a certified tax professional; he had never handled ISOs before and got
it wrong. I did it myself, and it wasn't really that bad. Hired a different
CPA to double check it, and he said it looked fine.

That being said I still suggest to everyone who has never been through it
before to get a professional involved.

~~~
delinka
"I hired a certified tax professional; he had never handled ISOs before and
got it wrong."

OK, don't got hire just _any_ professional. Maybe check on their experience
first. ;-)

~~~
schmichael
Ha, yeah, now I know not all tax professionals are created equal. He of course
acted like he knew how to handle it right up until the end and only let it
slip once that this was the first time he'd actually handled them. His advice
ended up being "they're not taxed, just ignore them until you sell the actual
shares" which I knew was wrong.

------
lgcoleman
It completely depends what type of options you have.

If they are incentive stock options then you will need to report the value of
the bargain element (fair market value of the options less the amount you
actually paid) as AMT (alternative minimum tax) income. The AMT tax rate is
~27%.

Say your stock is worth $110 and you pay $10. Your bargain element is $100 and
your AMT is ~$27, federal. Your state could also have tax reporting
requirements on the exercise of your options.

This assumes you exercise and hold. If you sell the shares after exercise a
whole host of other issues come into play.

Fairmark.com is a good resource for the tax implications of equity
compensation.
[http://fairmark.com/execcomp/index.htm](http://fairmark.com/execcomp/index.htm)

Good Luck!

~~~
toomuchtodo
Would it be fair to say that, if one was set on exercising, that they do so
for whatever amount has vested after their one year cliff, and then exercise
the remainder (13/48-48/48) each month over their 4 year earn out in order to
have as much of the stock covered under long term capital gains tax when it
comes time to sell?

Hypothetically speaking, of course.

~~~
lgcoleman
This assumes your shares are worth more than your exercise price. :)

In order to get long-term capital gain treatment you will need to hold the
shares for 1 year + 1 day. And more than 2 years from the grant date (this
part usually isn't an issue).

By exercising every month after the 1 year cliff you essentially dollar-cost
averaging your purchases. You might also want to use a similar strategy when
it comes time to sell.

Also keep in mind that the long term capital gain rate is currently 20% plus
3.8% net investment income tax. (Again this if federal only).

~~~
toomuchtodo
Thank you for following up. Off to get my 409A valuation docs from HR :-P

