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Here is a thread in which I explain various technical points relating to the tax treatment of stock options: https://news.ycombinator.com/item?id=2623777

Adding to this on your specific question about loss: when you exercise options, your purchase price becomes the basis in your stock; if the company fails and goes bankrupt, for example, you can deduct the amount of the basis as a capital loss; this means you can offset this amount (i.e., deduct it outright) against other capital gains you might have in that same year or in future years (as part of a capital loss carryforward) but you cannot otherwise deduct it outright; in general, federal tax law in such cases allows you to deduct it at the rate of up to $3,000 in any given year, with the rest carried forward for future potential deduction (this is the capital-loss carryforward).

Hope this helps.

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