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Comment by cyanydeez | Hacker News Reader

Why do people act like the tax's is greater than the cash flow, like it's some unthinkable crime to pay tax.

In this case, the way it works is:

1. You exercise your options, for a paper gain of millions of dollars

2. However, you can't actually sell the shares (there are likely contractual restrictions on selling them, and even if not, there's not a liquid market)

3. So you have to pay millions of dollars of taxes even though your cash flow is zero.

And before you say "but they're ISOs", there's no such thing as ISO's under AMT so it doesn't help at all.

> for a paper gain of millions of dollars

which is why this part should never have been taxed. Until there's a sale of those shares, the price is merely an estimate and thus is not and should not be considered the FMV.

Not sure what you mean by "should" here, but the IRS definitely considers it to be a gain that you have to pay taxes on, regardless of whether you can sell the shares.

Yes that's exactly the problem. Why does it seem okay for the IRS to demand a million dollars from someone who has no way to pay that? Like, doesn't that seem like something is wrong/broken somewhere? There's a cottage industry of loan sharks who will lend people money so they can pay, but how about instead the IRS not take money from people who don't yet, and may not ever, actually have the money to pay, until they, y'know, have the ability to pay off that tax bill.

Would I own tax then on the classic car I bought 20 years ago which is now worth 10x the buying price and I can actually sell it for that, even though if I won't sell it?

No, because the IRS has special rules about exercised options being recognized as income in the year they were exercised.

A tax deferred is a tax avoided. I can take any financial gain and turn it into a "paper profit". So those have to be taxed.

PS: I feel for these employees. My question is: Did they have the same access to the secondary market as the founder?

> I can take any financial gain and turn it into a "paper profit"

if you did, you would not have access to make use of those "paper profits" for consumption - it would remain an investment. This makes taxing it egregious imho.

Because in this case they're going to be taxed on money they can't, and possibly won't ever, be able to access. It's like being required to pay tax on lottery winnings before you get a chance to enter the lottery.

Why is that even treated as income then? That's like the government asking for more taxes from me because I have the potential to make money in the future if I'm lucky.

Because shares in a company represents something of value. Just because a company’s shares are privately held doesn’t make them worthless. The IRS has ways to estimate valuations of privately held companies.

The problem unique to folks likely to be reading here is the exponential growth that can happen in early stage start ups. The options might’ve represented 100k in value when they were granted, but grown to 1m in value by the time they vested.

If you exercise you owe ~300k in taxes. Even if you have that cash the exercised shares could become worth 0 and you’ll just be out the money.

If they become worth zero do you not have a capital loss to deduct from future income? So you would gradually recover the tax paid when you got the now worthless shares in the form of future taxes you don’t have to pay.

You would have a capital loss to carry forward, and this is part of why the current rules aren’t great for people who aren’t already wealthy. If the tax bill is a big chunk of your net worth it makes it hard to take advantage of what might be a great opportunity.

I understand how the law works, but it's quite silly to consider the shares as having value when it's literally impossible to convert them to that "value" to pay the tax. By definition the shares do not have value.

It's like if I handed you a coin that I promise is worth one million because I will buy it from you for one million right now, except I won't buy it from you now and I don't plan on buying it from you ever in the foreseeable future, and if I do buy it from you later it won't be for one million.

In this context companies aren’t a pinky swear “I promise this has value”. A 10x valuation increase for a private company happens for a reason: for VC funded start ups that is often because they did an up round. Someone else put a lot more money on the line than an employee exercising their options would.

I agree with you the current rules kind of suck for employees at start ups increasing in value, but framing values as just made up is overly reductive.

> By definition the shares do not have value.

Good thing that nobody is forcing you to take ownership of that worthless thing then.

The tax is greater than the cash flow because stock you can't sell provides $0 in cash flow.

mainly because the tax is greater than the cash flow?

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