Expiration date on exercising options – total BS? | Hacker News Reader

Expiration date on exercising options – total BS?

2 pointsdrschafran7 comments

I don't understand why there is an expiration date on exercising stock option grants. Anyone have a compelling reason why this even exists? Seems to force stock option holders to 1) Make decisions when they aren't necessarily ready to and 2) Take on tax burdens before they ever see a payout.

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>Take on tax burdens before they ever see a payout.

That is not a given. First, it only applies to one type of equity compensation (Incentive Stock Options), other types of options do not trigger any tax upon exercise. Second, if there is a tax burden, it is only due to timing, it is not a permanent difference (is netted out when stock is sold). Third, exercising ISOs only triggers U.S. tax (AMT) if exceeding the AMT tax threshholds, which are currently very high.

the incentive part of ISO is you don't pay regular tax - other stock options you do though. unless you're talking about an 83b election(early exercise), or double trigger rsus, but those are not really types of options. also, amt limits are rather low, they didn't adjust for inflation for a long time so its surprisingly easy to hit, anecdata but I know a ton of people hit by it

>amt limits are rather low, they didn't adjust for inflation for a long time so its surprisingly easy to hit

That is old information. Yes, for a number of years Congress had to temporarily extend the higher AMT exemption amounts, but they became permanently inflation-indexed beginning 2013.

Also, we are in the middle of an eight-year temporary change (TCJA) that further increased AMT exemption amounts, so in fact no, it is no longer easy to hit.

"The 2017 Tax Cuts and Jobs Act (TCJA), included provisions that significantly reduced the impact of the AMT. The TCJA enacted a higher AMT exemption and a large increase in the income at which the exemption begins to phase out. It also repealed or scaled back some of the largest AMT preference items—personal exemptions, the state and local tax deduction, and miscellaneous deductions subject to the 2 percent of adjusted gross income floor—further limiting the AMT’s scope. As a result, TPC estimates that the number of AMT taxpayers fell to just 200,000 in 2018 and will remain roughly constant through 2025."[0]

[0]https://www.taxpolicycenter.org/briefing-book/what-amt

An American call option (one that can be exercised at any time) is generally worth more as the tenor (time to expiration) increases. Option compensation is a cost for the employer. To keep compensation costs constant, an employer who granted longer term options would have to grant fewer of them.

the irs defines the rules for an ISO, so to be incentivized it must exercised within 90 days of leaving. with an NSO(or ISO), the limit is ten years from grant, again set by the irs - you can still be employed and have to deal with this. until recently, companies typically gave ISO - this means they had to do ninety days. so first, blame goes towards the IRS.

ISO are generally more favorable because you dont owe regular income tax at exercise - with NSO you do owe tax on the difference between grant and FMV prices, even if you can't sell it. However, AMT does not recognize ISOs so you may owe AMT against that same difference. AMT is weird though, you can get that money back over future years by claiming tax credits

luckily, the trend seems to be to convert ISO to NSO and extend the expiration, but thats still a relatively new change and not everywhere.

s/IRS/Congress/

One reason is that companies don’t want to have a potentially very large amount, potentially forever, on their balance sheet.

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