Can someone explain: if you exercise and hold the shares (eg leave the company) do you owe tax after year seven, even if the shares remain illiquid?
That's the core issue: the IRS is taxing individuals on truly illiquid assets.
That's the core issue: the IRS is taxing individuals on truly illiquid assets.
If there's still risk, taxes are paid, and the risk materializes and no gains are made at the end, how is that fair?
Exactly. And what the article or the linked Bill summary fails to make clear (unless I missed it) is whether the tax amount is based on the value of the stock the day the options are exercised, or when the tax is paid. By the time the stock becomes liquid, it might be worth far less than that it was when the options were when the options were exercised. Maybe far less than the actual tax bill. And what happens if the stock's value goes to zero?
I'm with you on this. I don't see why they can't tax this like any other stock trade, where you pay tax on the actual monetary gain, after it has been realized.
The only way that this sort of makes sense is if you can pay your tax in illiquid assets - e.g. If you can pay your tax with the same shares.
The most logical tax code I know can be summarized as: no basis step-up except on an event when taxes are paid; taxes are paid whenever (and only if) something liquid gets exchanged. Even an exchange of illiquid with illiquid doesn't trigger step up or tax event.
As long as it is illiquid, taxing gains seems about as logical is randomly announcing "everyone should mark their assets now and pay taxes on unrealized gains" (which the IRS actually does if your financial asset is outside the US, but it is still crazy)
Of course, the devil's in the details as you probably don't want the government having voting shares in a bunch of private companies either... Maybe they just get a blanket clause to automatically exercise and sell as part of any IPO offering or something?
This could have a double-down effect too as the government owns more illiquid stock and feels firsthand the pain of regulations (SarbOx anyone??) that result in fewer IPOs / longer time horizons to liquidity.
Oh your revenue is going down because you've regulated companies out of the IPO market? Great, looks like time to get off your ass and actually FIX THE PROBLEM. C'mon guys.
We helped lobby and push for this bill and I'm glad to see it making progress in providing better options for startup employees.
Equity is awful for a lot of reasons, but I'll never be convinced second-market selling is the panacea.