Tax Treatment of Employee Stock Option -- Fair? Unfair?
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... )
The Options let you purchase a certain number of stocks any time within 10 years at a fixed price, which is equal to the market price of the stock at the time the option is granted. That's it.
When you use that Option do buy the stock (at the fixed price specified in the Option), you are said to "excercise" (выкупаешь) the Option.
It usually does not make sense to excercise the Option before it expires (10 years or you are leaving your job) and then hold the stocks you got. Normally, people excercise the Options and sell the Stock on the same day.
It cerainly does not make sense to excerise the Option as soon as it is vested. Since the Option's fixed price is the market value when the option was granted, if you excercise the Option soon after it is granted, you are not getting much value out of it. You could probably just buy the stock for a similar price on the market without using up the option.
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. The only people who would be willing to excercise the Employee Stock Option before it expires and hold the stock (and, therefore, get a preferable tax treatment) are the ones who think that they stock has risen so much that is guaranteed not to dip anywhere near the option's fixed price while they are holding it.
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просто в моем случае I guess я попадаю в категорию описанную в последнем абзаце (ну т.е. есть надежда :) )
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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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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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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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