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Comment by gameshot911 | Hacker News Reader

Using your example, can you not just subtract the $1M tax from the $5M payout? If the tax is actually due as a separate transaction before the payout appears in your bank account, wouldn't it be fairly easy to get a risk-free loan? Sure it's a lot of money, but isn't it 0 risk for the lender?

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I think the point is that there is same-year tax liability on the $5M value, but there is no guarantee on getting the $5M payout that same year (or ever, for that matter). When you exercise your options, you now hold shares in a private company, which may restrict your ability to realize the payout in various ways.

Yes, exactly this.

Isn't the problem that there is no $5MM payout? After paying a few tens of thousands for the below-market-price shares, you're the new owner of some shiny private shares, for which there is probably no market. In the future event of an acquisition or public offering, there's a chance of a payday.

You're missing the problematic part. It's when you've exercised an option that gives you a non-cash, notional ("paper" or "unrealized") gain, and you have to pay taxes on that in cash.

This should really be solved by letting you transfer (or somehow attach) the shares to the IRS at the value they "believe" they are worth in lieu of the tax on those shares. Or better yet get rid of the whole AMT mess entirely.

There is no $5mm payout in this scenario. This is the paper value of the shares, which you must pay taxes on since the IRS considers them income. In other words, the IRS thinks you have received something worth $5mm in value, so you must pay taxes on it.

The problem here is the IRS wants its $1 million in cash, but the only way you can turn those shares into cash is to sell them to someone.

If there's no one willing to buy at least $1 million from you, then you can't pay the IRS.

The $5M value is illiquid and speculative (based on startup valuation). In effect, this would make the bank a defacto investor, and most bank lenders are weary of startup stock as collateral. Definitely NOT zero risk!

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