Trump's Full Court Press on Tax Reform

[The Meal]

If I give you an option to buy 100 shares currently selling for $100/ share at a price of $10/share, I have basically given you $9,000 (minus transaction costs). We tax people all the time on the value of non-cash items received, so conceptually it's not different to tax options pre-sale - it's basically a non-cash item of value (again, assuming that the price on the option is below some measure of the stock's market value).

What's the taxable amount if you give me the option to purchase 100 shares at $10 each, three months from now, our stock currently priced at $10? Is that taxable value 0 compared to you giving me the same option to purchase those shares at $9 each? Do I get tax relief if you give me that option to purchase shares at $11 each?

Tax these things when an actual transaction has taken place.

I've seen plenty of upside-down option grants happen which don't vest for years, in an attempt to keep folks at a company. Sure they're worthless today, but if you bust your ass and increase stock price, and if you stick around for four years, these things are golden tickets.

Just seems an odd way to tax things, especially considering that a (an easily valued) true-value transaction either will or will not occur in the future.

[RunningMn9]

I have basically given you $9,000 (minus transaction costs).

Except that you haven't basically given me $9,000.

And *again*, if the difference between the strike price and the market value results in a loss, can I use that to wipe out actual income? Then what happens when I ultimately exercise the option and make a profit? It's not stupid to tax people when they win a car. Because they won a car. They physically have the car.

A stock option grant is nothing like that. Even when it vests, because the potential value can fluctuate wildly. Picking a moment in time, when I still have *nothing*, is stupid. Picking the moment that I realize the gain solves all of the problems inherent in tracking the issue.

[Max Peck]

Nobody knew that taxes could be so complicated.

[PLW]

I believe that options are clearly compensation. I also agree that that can be hard to value. There are lots of sorts of compensation we don't tax. Like health insurance.

[noxiousdog]

I get where you guys are coming from. I just disagree.

It is compensation. Period. End of story.

Being given the option to buy something isn't compensation ...
End of story.

Then why would you accept it in lieu of salary?

Is this line of argument that everything negotiated in lieu of salary should be taxable?

No. The argument would be that it has value.

The follow up would then be how much value and is it measurable?

[Ænima]

Also, in almost all of these arrangements, if you don't exercise the options within 3 months of leaving the company, they evaporate. I've been in tech startups basically my whole career, and this will absolutely cripple them in the short term. Long term is TBD.

[Rip]

I get where you guys are coming from. I just disagree.

It is compensation. Period. End of story.

What are you talking about?

Being given the option to buy something isn't compensation until you make the decision to do so. Over the years I've dealt with 10s of thousands of options. If I had to pay taxes on the them when they were granted/vested, rather than when they were exercised, it would have been financially crippling.

Giving me the stock? Yes, that's compensation. If my employer gives me 500 shares of stock, that's direct compensation, whether I sell them or not. If my employer lets me buy 500 shares of stock - that isn't compensation. That's me buying 500 shares of stock.

If I then sell those shares of stock, then tax me on the proceeds (or let me deduct the loss). The idea that they are somehow compensation - at the moment they are granted or vest, is stupid.

End of story.

Then why would you accept it in lieu of salary?

I'm with Rm9 and it is in lieu of bonus if anything. I liken it to $5 in lottery tickets in lieu of a $5 bonus. Only all the lottery tickets have the same number.

[noxiousdog]

kind of like how we tax people on the value of a free car won in a sweepstakes, for example - but that it seems like there are a lot of practical aspects that would have to be factored into how that would be done.

But in that case, I've won a car. Like. I have the actual car. In the case of stock options, I've "won" the ability to buy stock at a certain price. I don't have any shares of stock. If the strike price is $10 per share when granted, but $5 per share when vested, do I get to deduct $5 per share from my taxes?

What happens if I don't exercise them until the following year, when they are $15 per share? The strike price was $10, but I got a tax credit for $5, and now I pay capital gains on the $10 in between the $5 and $15, even though I actually only made $5 per share?

That's an asinine system.

If I pay $10 per share to buy the stock, and sell it immediately for $15 per share - then hit me with income tax on the $5 per share that I made on the deal.

So, it's ok if Jeff Bezos grants himself $1 strike price options expiring 2100 in lieu of any salary so he no longer has to pay income tax?

[Zaxxon]

I get where you guys are coming from. I just disagree.

It is compensation. Period. End of story.

Being given the option to buy something isn't compensation ...
End of story.

Then why would you accept it in lieu of salary?

Is this line of argument that everything negotiated in lieu of salary should be taxable?

No. The argument would be that it has value.

The follow up would then be how much value and is it measurable?

I mean, yes--it has value if and when it's exercised. And--conveniently--it's measureable at that point in time, as well!

Taxing options at any time other than exercise is pretty much literally nonsensical.

[noxiousdog]

I believe that options are clearly compensation. I also agree that that can be hard to value. There are lots of sorts of compensation we don't tax. Like health insurance.

We do now when it is designed as compensation rather than health insurance.

[Blackhawk]

There's a difference between actual value and potential value.

[noxiousdog]

I get where you guys are coming from. I just disagree.

It is compensation. Period. End of story.

What are you talking about?

Being given the option to buy something isn't compensation until you make the decision to do so. Over the years I've dealt with 10s of thousands of options. If I had to pay taxes on the them when they were granted/vested, rather than when they were exercised, it would have been financially crippling.

Giving me the stock? Yes, that's compensation. If my employer gives me 500 shares of stock, that's direct compensation, whether I sell them or not. If my employer lets me buy 500 shares of stock - that isn't compensation. That's me buying 500 shares of stock.

If I then sell those shares of stock, then tax me on the proceeds (or let me deduct the loss). The idea that they are somehow compensation - at the moment they are granted or vest, is stupid.

End of story.

Then why would you accept it in lieu of salary?

I'm with Rm9 and it is in lieu of bonus if anything. I liken it to $5 in lottery tickets in lieu of a $5 bonus. Only all the lottery tickets have the same number.

Lottery tickets aren't free. If I were to cut a deal with my company to pay me $1000 in lottery tickets in lieu of salary, I would be taxed $1000 by the IRS.

[noxiousdog]

I mean, yes--it has value if and when it's exercised. And--conveniently--it's measureable at that point in time, as well!

Taxing options at any time other than exercise is pretty much literally nonsensical.

Weird.

I'm pretty sure I get a value for any publicly traded option.

[Zaxxon]

I mean, yes--it has value if and when it's exercised. And--conveniently--it's measureable at that point in time, as well!

Taxing options at any time other than exercise is pretty much literally nonsensical.

Weird.

I'm pretty sure I get a value for any publicly traded option.

And you're taxed on it when it's exercised or expires, not when you receive it.

[Ænima]

You have to buy your publicly traded options, so they have a very obvious value. If you are going to tax me on my options, then you have to figure out the amount of compensation I am giving up for those options in order to acquire them, which I should be able to write off as a loss until the options have at least that value.

[noxiousdog]

I mean, yes--it has value if and when it's exercised. And--conveniently--it's measureable at that point in time, as well!

Taxing options at any time other than exercise is pretty much literally nonsensical.

Weird.

I'm pretty sure I get a value for any publicly traded option.

And you're taxed on it when it's exercised or expires, not when you receive it.

Or sell it.

If my parents gifted me options, I'd have to pay taxes on the gift above the gift tax threshold.

[Smoove_B]

While all you elites argue about your stock options, I'm going to merge two threads by indicating that the Senate modifications to the tax plan include a repeal of the "Obamacare mandate":

Repealing the so-called individual mandate, as President Trump had urged, would help Republicans with the difficult math problem they face in refining their tax plan. But it also risks reigniting the contentious debate over health care that Republicans found themselves mired in for much of the year.

“We’re optimistic that inserting the individual mandate repeal would be helpful,” Senator Mitch McConnell of Kentucky, the majority leader, told reporters.

First, FU to Mitch McConnell. Second, they truly are shameless. Completely shameless.

[Isgrimnur]

There are lots of sorts of compensation we don't tax. Like health insurance.

Yet

[Zaxxon]

Or sell it.

Correct--another case where the option is ended and true value determined.

If my parents gifted me options, I'd have to pay taxes on the gift above the gift tax threshold.

If you're proposing that we start taxing options over an exercise-able value of $5.5M or $11M when received, then we can have that conversation.

[PLW]

I believe that options are clearly compensation. I also agree that that can be hard to value. There are lots of sorts of compensation we don't tax. Like health insurance.

We do now when it is designed as compensation rather than health insurance.

I don't understand. A "compensation package" is a bunch of things you get in exchange for working a job. It includes (some subset of) salary, bonus, retirement benefits, health benefits, company car, housing subsidy, etc... Some of these are taxed and some aren't, but they are all compensation. There is a very narrow definition of "compensation" in some dictionaries that limits is strictly to salary/wages, but that's not how we (or.. at least me and the people I know) usually use it.

[The Meal]

I get where you guys are coming from. I just disagree.

It is compensation. Period. End of story.

Being given the option to buy something isn't compensation ...
End of story.

Then why would you accept it in lieu of salary?

Is this line of argument that everything negotiated in lieu of salary should be taxable?

No. The argument would be that it has value.

The follow up would then be how much value and is it measurable?

I've been granted a fair number of options that have had no value. I've also been fortunate enough to have been granted options which did translate into value, but those were well after my original experience. The value I placed in the later options grant was zero (so imagine my surprise...)

The amount I was taxed on my zero value options? $0.
The amount I was taxed on the options which translated into value? Capital gains rate.

[The Meal]

So, it's ok if Jeff Bezos grants himself $1 strike price options expiring 2100 in lieu of any salary so he no longer has to pay income tax?

I'm pretty sure I get a value for any publicly traded option.

If my parents gifted me options, I'd have to pay taxes on the gift above the gift tax threshold.

Lumping these three things together so that I may formulate a legitimate-I-didn't-know-that/are-you-sure question. Is publically trading options a thing? I've only ever experienced options which were 100% non-transferrable until they were exercised, and they could only be exercised by me.

I get the sense that folks think options are like bonds (the Bezos hypothetical). The concept of gifting or selling options is completely foreign to me.

[RunningMn9]

So, it's ok if Jeff Bezos grants himself $1 strike price options expiring 2100 in lieu of any salary so he no longer has to pay income tax?

It would be the Board of Directors that grants them to him, but yes. Of course, strike prices aren't generally pulled out of thin air like that, but yes.

I'm pretty sure I get a value for any publicly traded option.

You do, because a publicly traded Call/Put is a thing that has value unto itself. An employee stock option isn't a thing that has value unto itself. There is no market for it, and it cannot be traded.

Again - this problem is solved completely by taxing the individual if and when the employee stock option is exercised. At that point you know exactly how much they gained (Exercise Price less Strike Price). It literally could not be easier. ESPECIALLY since they are going to tax you at that time anyway, just in case you've gained more money that they can get their paws on.

I've never once been granted stock options in lieu of salary, and I've received over a dozen grants from multiple companies for many thousands of options. Crafting tax law to combat Jeff Bezos, at the expense of the millions of tech employees that were in my boat is absurdly ridiculous.

At my first company I had several thousand options with a strike price of about $5. When they vested, the price was below $2. About a year before they expired, there was a magical day when the price spiked to $54 and I sold all the options at around $30 per share. What purpose would there have been to tax me when they vested? They were underwater by $3 per share. When I sold them, I had to pay tax on $25 per share gains I had. The Feds got theirs.

[RunningMn9]

Is publically trading options a thing?

He's conflating calls/puts with employee stock options. They are fundamentally different - most notably because employee stock options have no financial value and cannot be traded or transferred in any way.

[Rip]

I get where you guys are coming from. I just disagree.

It is compensation. Period. End of story.

What are you talking about?

Being given the option to buy something isn't compensation until you make the decision to do so. Over the years I've dealt with 10s of thousands of options. If I had to pay taxes on the them when they were granted/vested, rather than when they were exercised, it would have been financially crippling.

Giving me the stock? Yes, that's compensation. If my employer gives me 500 shares of stock, that's direct compensation, whether I sell them or not. If my employer lets me buy 500 shares of stock - that isn't compensation. That's me buying 500 shares of stock.

If I then sell those shares of stock, then tax me on the proceeds (or let me deduct the loss). The idea that they are somehow compensation - at the moment they are granted or vest, is stupid.

End of story.

Then why would you accept it in lieu of salary?

I'm with Rm9 and it is in lieu of bonus if anything. I liken it to $5 in lottery tickets in lieu of a $5 bonus. Only all the lottery tickets have the same number.

Lottery tickets aren't free. If I were to cut a deal with my company to pay me $1000 in lottery tickets in lieu of salary, I would be taxed $1000 by the IRS.

How much does it cost to buy stock options?

[stessier]

While all you elites argue about your stock options, I'm going to merge two threads by indicating that the Senate modifications to the tax plan include a repeal of the "Obamacare mandate":

Repealing the so-called individual mandate, as President Trump had urged, would help Republicans with the difficult math problem they face in refining their tax plan. But it also risks reigniting the contentious debate over health care that Republicans found themselves mired in for much of the year.

“We’re optimistic that inserting the individual mandate repeal would be helpful,” Senator Mitch McConnell of Kentucky, the majority leader, told reporters.

First, FU to Mitch McConnell. Second, they truly are shameless. Completely shameless.

It's shameless but it's also the only way they can get the numbers to work. They say it will save $330 billion over ten years which is needed because the current plan doesn't save enough to make the cuts last ten years under Senate rules. The fact that it means 13 million more people will be without insurance doesn't seem to bother them. McCain even came out and said he could vote for it.

[Kraken]

While all you elites argue about your stock options, I'm going to merge two threads by indicating that the Senate modifications to the tax plan include a repeal of the "Obamacare mandate":

Repealing the so-called individual mandate, as President Trump had urged, would help Republicans with the difficult math problem they face in refining their tax plan. But it also risks reigniting the contentious debate over health care that Republicans found themselves mired in for much of the year.

“We’re optimistic that inserting the individual mandate repeal would be helpful,” Senator Mitch McConnell of Kentucky, the majority leader, told reporters.

First, FU to Mitch McConnell. Second, they truly are shameless. Completely shameless.

I don't understand how the Obamacare mandate is a cost. First, the IRS was already ordered not to enforce it; and second, it obliges those who forgo insurance to pay a token penalty. Why is that not a revenue source (if it were enforced, I mean)? How does repealing it save the gubmint big bucks? Do they assume that significant numbers will drop out of the system without the toothless mandate, thereby reducing subsidy costs? If so, what's that assumption based upon?

I don't understand stock options, either. I live a sheltered life. Seems to me like that would affect a very small number of people...all of whom post here, apparently.

[LawBeefaroni]

I get where you guys are coming from. I just disagree.

It is compensation. Period. End of story.

What are you talking about?

Being given the option to buy something isn't compensation until you make the decision to do so. Over the years I've dealt with 10s of thousands of options. If I had to pay taxes on the them when they were granted/vested, rather than when they were exercised, it would have been financially crippling.

Giving me the stock? Yes, that's compensation. If my employer gives me 500 shares of stock, that's direct compensation, whether I sell them or not. If my employer lets me buy 500 shares of stock - that isn't compensation. That's me buying 500 shares of stock.

If I then sell those shares of stock, then tax me on the proceeds (or let me deduct the loss). The idea that they are somehow compensation - at the moment they are granted or vest, is stupid.

End of story.

The value of an option is the difference between the price of the option and the market value (current or anticipated) of the underlying stock. If I give you an option to buy 100 shares currently selling for $100/ share at a price of $10/share, I have basically given you $9,000 (minus transaction costs). We tax people all the time on the value of non-cash items received, so conceptually it's not different to tax options pre-sale - it's basically a non-cash item of value (again, assuming that the price on the option is below some measure of the stock's market value).

If they can't be exercised yet, you've just given me a promise. Are IOUs and AR taxable?

[noxiousdog]

Is publically trading options a thing?

He's conflating calls/puts with employee stock options. They are fundamentally different - most notably because employee stock options have no financial value and cannot be traded or transferred in any way.

If they have no value, why are you getting them?

You are ignoring they are the same thing, only with restrictions. Just like restricted stock units or a Employee grants that aren't salable within a certain time frame of an IPO.

Those things may change the value of the stock/option, but it is still non-zero.

[noxiousdog]

If they can't be exercised yet, you've just given me a promise. Are IOUs and AR taxable?

It depends.

As I said before, if your company paid you in lottery tickets, it would be taxable. It depends on the expected value of the ticket.

[noxiousdog]

How much does it cost to buy stock options?

It depends on the strike price, the current value of the stock, and the expiration date.

[noxiousdog]

At my first company I had several thousand options with a strike price of about $5. When they vested, the price was below $2. About a year before they expired, there was a magical day when the price spiked to $54 and I sold all the options at around $30 per share. What purpose would there have been to tax me when they vested? They were underwater by $3 per share. When I sold them, I had to pay tax on $25 per share gains I had. The Feds got theirs.

Interesting. This exactly proves my point.

Had I wanted to do the same thing as a non-grantee I would have had to go out and bought those options.

You were paid them.

How is that not income?

[The Meal]

stock options have no financial value and cannot be traded or transferred in any way.

If they have no value, why are you getting them?

You are ignoring they are the same thing, only with restrictions.

The restrictions absolutely mean that you can receive options with no value (as I have).

[Isgrimnur]

Schrödinger's income.

[noxiousdog]

Lumping these three things together so that I may formulate a legitimate-I-didn't-know-that/are-you-sure question. Is publically trading options a thing? I've only ever experienced options which were 100% non-transferrable until they were exercised, and they could only be exercised by me.

I get the sense that folks think options are like bonds (the Bezos hypothetical). The concept of gifting or selling options is completely foreign to me.

Publicly traded options are most definitely a thing. A January 2018, $155 strike price Apple option can be bought for $10.75 at the close of markets yesterday.

I do not actually know if these are transferable, but I can't see why not. They are contracts. If I died, my wife would get them. If we both died, my kids would.

Employee stock options are also a thing. I absolutely understand why they would be valued less than than their public counterparts as they are typically not transferable other than in a death situation post vesting. But they still have value.

[noxiousdog]

If you're proposing that we start taxing options over an exercise-able value of $5.5M or $11M when received, then we can have that conversation.

You're talking about estate taxes. Gifts only have a $14,000 exception.

[noxiousdog]

stock options have no financial value and cannot be traded or transferred in any way.

If they have no value, why are you getting them?

You are ignoring they are the same thing, only with restrictions.

The restrictions absolutely mean that you can receive options with no value (as I have).

Agreed. Many options are close enough to worthless to be irrelevant. There's no universal number that would work. Every grant would have to be analyzed. There are models (Black-Scholes for example) for that.

[The Meal]

You know, I feel like an idiot, because I've heard of options trading and am familiar with puts and calls.

Why they would be discussed (taxation-wise) as functionally overlapping employee-granted options when they're obviously such completely different beasts is beyond me. But nobody holds a gun to my head to try to support or refute what seems obvious to me. Cheers.

[geezer]

If they can't be exercised yet, you've just given me a promise. Are IOUs and AR taxable?

It depends.

As I said before, if your company paid you in lottery tickets, it would be taxable. It depends on the expected value of the ticket.

You've just answered your own question. At the time employee options are granted, the expected value is unknown. I could also argue that the only reasonable expected value is zero. In either case, there's no basis on which to establish a taxable amount. Which, as RM9 points out, is goofy from the start because later in there is an extremely easy way to establish an actual exact value.

[noxiousdog]

You've just answered your own question. At the time employee options are granted, the expected value is unknown. I could also argue that the only reasonable expected value is zero. In either case, there's no basis on which to establish a taxable amount. Which, as RM9 points out, is goofy from the start because later in there is an extremely easy way to establish an actual exact value.

Somebody knows the value of the option.

How do you think they decide to give you 100 or 1000?