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Comment by seattle_spring | Hacker News Reader

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.

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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.

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.

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.

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