Tax Treatment of Employee Stock Option -- Fair? Unfair?

Feb 21, 2007 15:45


Inspired by: http://angerona.livejournal.com/665475.htmlWhat are the employee stock options? Are they a mere "promise of a bonus" or a "valueable investment position"? I know the IRS's answer. But I am after reasons/logic/fairness here ( Read more... )

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svechka February 21 2007, 22:25:35 UTC
я, признаюсь, в этом всем чайник, но с точки зрения получения бонусов ежегодно vs exercising your stock options all at once when you left the company - ведь теоретически, ты мог выкупать options are they vested, right? So in effect it was your decision to buy exercise them all at once :) (i'm not placing the blame, just theorizing!)

Отсюда следующий вопрос: if you bought them as they vested and held them, what would you be taxed on? The spread between your strike price and the market price on the day when you exericised? If that's the case, woudln't it make sense to exercise them when the market price is low?

Дальше - если ты выкупил options и держал их хотя бы год, а потом продал - на что берется налог?

в общем я просто задумалась, потому как у меня тоже есть vested options that have not been exercised, и возможно надо по этому поводу почесаться :)

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igorlord February 21 2007, 22:58:14 UTC
ты мог выкупать options are they vested

But that makes little economic sense to do. Options are not stocks.

If the options were vested immediately, they would be worthless when they vest anyway. An Option (a Call Option like the ones we are given) is a right to buy 1 share at the set price (the market price on the day the option is granted) any time within 10 years or until you leave the company.

If the option is vested right away, it has no value to you -- you can just buy the stock at the market price yourself; no need to use the option.

The whole value of the Option is its Time Value -- you do not have to put the money down today and can enjoy the same growth as if you did buy the stock and held it. Also, if the stock declined from today's value, you are protected -- you just do not use your option.

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svechka February 21 2007, 23:39:47 UTC
а, поняла - у вас речь идет о совсем других options
never mind :))

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angerona February 22 2007, 09:45:28 UTC
The spread between your strike price and the market price on the day when you exericised? If that's the case, woudln't it make sense to exercise them when the market price is low?

That's like saying that one should get a job paying as little as possible, because then they'd pay less taxes :).

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svechka February 22 2007, 09:55:11 UTC
Люсь, я имела ввиду другой тип options - там цена, по которой ты их выкупаешь (не продаешь!) установлена изначально и не зависит от текущей цены на маркете. А налог, если я не ошибаюсь, учитывает разницу между твоей ценой и ценой на рынке (т.е. сколько бы ты получила прибыли, если бы ты эти options выкупила и тут же продала...) Поэтому имеет смысл выкупать такие options, когда цена на рынке низкая. А продавать когда высокая, есс-но :)

Опять же, я не ручаюсь за достоверность этой информации - что-то краем уха слышала когда-то...

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igorlord February 22 2007, 18:28:54 UTC
We are probably talking about the same options (there are really not many "kinds ( ... )

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svechka February 22 2007, 18:37:20 UTC
поняла :)
просто в моем случае I guess я попадаю в категорию описанную в последнем абзаце (ну т.е. есть надежда :) )

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igorlord February 22 2007, 19:46:48 UTC
There are still questions about the prudency of such choice.

1. You are using up the money that you could had invested in something else while holding the Options. You are paying an Oportunity Cost.

2. By holding your company's stock, you are not diversifying your portfolio. If you were to excercise the options and immediately sell your stock (same day sale -- the most usual stock option excercise transaction), you could use the very same money to buy some other stock / mutual fund. You'd be paying the same low cap gains tax no matter whether you are holding your company's stock you got from Options or some other portfolio. You are taking on extra risk, when it is not likely to improve either return or taxes.

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svechka February 22 2007, 21:32:31 UTC
ну там же еще есть разница между long term and short term capital gains. Я взглянула на информацию про налоги - короче, если выкупить и не продать сразу, то с одной стороны, ты наверное выигрываешь из-за long term cap gains, но с другой можешь попасть под AMT, который таки да учитывает рыночную стоимость твоих options в день покупки...

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igorlord February 22 2007, 21:38:39 UTC
Oh, you are talking about ISOs. Yes.

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igorlord February 22 2007, 22:41:26 UTC
Oh, you are talking about ISOs. Yes, you are right. With those, you really should keep the stocks for at least a year. But with ISOs, it makes even less sence to excercise early -- as long as you keep the stocks for over a year, you pay cap gain on the entire price different.

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syarzhuk March 20 2007, 12:51:51 UTC
Generally, the Option allows you to be invested in the stock position without having to pay for the stock in advance and shielding you from the risk that the stock will drop below the Option's fixed price.
I guess that lowered risk is the reason why IRS decided to not give option holders the preferential capital gains treatment

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igorlord March 20 2007, 16:36:39 UTC
Yes, and I am ok with that.

Instead, I am saying that my prefered way of taxing the options is considering that the company is giving you $$$ equal to the value of the option on the grant day (and taxing that as income). Then, when and if you excersise the option, the grains are to be taxed as "cap gains" (since now you are no different from the regular investor who invests by buying options on the market).

The only difficulty is assignign a value to the employee stock option, but companies now have to do so anyway for the regulatory purposes.

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