Hacker News Reader

Comment by samclearman | Hacker News Reader

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.

View on HN

> 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.

Reply on news.ycombinator.com