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Poll: Options Tax Problems Are Common

A significant proportion of the people that have taken Light Reading's Work Poll this month say they've been burned by big tax bills on the options they've exercised. Even so, the majority say they still consider stock options as a valuable form of compensation.

The issue is a hot one, judging by the message board response to Friday's article on Alternative Minimum Tax (AMT) in the U.S. In the article, an example is given of Ron Speltz, who exercised incentive options in the company he worked for, McLeodUSA Inc. (Nasdaq: MCLD), and then held onto his shares in the expectation of their price going up. In fact, the price plunged and Speltz ended up with a tax bill of more than $250,000 that he couldn't pay (see No Relief for AMT Sufferers).

Speltz is far from alone, according to the results of the Work Poll, which has so far been taken by 141 people.

Some 15 percent of respondents say they face "huge problems" as a result of getting burned by taxes on options they've exercised. A further 12 percent say they've paid more tax then they feel they should have, but wouldn't go as far as saying they've been burned.

The poll also underscores that AMT isn't the only tax on options that catches people out. AMT is cited by 31 percent of respondents, but North American capital gains tax (CGT) is cited by another 25 percent. "Other" taxes -- that is, neither AMT nor capital gains tax -- are cited by 35 percent of respondents. (There's obviously some overlap here -- some respondents have run into trouble with multiple taxes.)

Only a small percentage of respondents, seven percent, say they borrowed money to exercise their options. There are instances of big cheeses getting into very deep water on this one. See, for instance, Tellium Execs in Trouble?.

Even so, the majority of survey respondents still think stock options are a valuable form of compensation. 39 percent checked "Options still attract me; the market could be on its way back", and 24 percent checked "I insist on getting options as compensation." Only 14 percent checked "The market is too risky to support options as payment."

To take the poll yourself, and see the results in detail, please click on this link.

— Peter Heywood, Founding Editor, Light Reading

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CogswellCogs 12/5/2012 | 12:37:46 AM
re: Poll: Options Tax Problems Are Common I believe that the poll should have included a choice for those of us who received ISOs and filed Section 83(b) forms. This can make a huge difference in tax liabilities. However, this filing is only applicable in certain situations.
Ringed? 12/5/2012 | 12:37:41 AM
re: Poll: Options Tax Problems Are Common I agree with CogswellCogs. The tax issues, be it AMT or LTCG in the article are circa, 2000 and possibly into the 2001 tax year.

But in the mean time it would be very interesting to find out how many folks exercised their 83b elections only to loose it all as start up companies as well as publically traded comanies went belly up or into Chapter 11 protection.

That combined with huge tax bills would be unbearable for nearly everyone. Only the financially fittest could have weathered such a storm.

Dented and Dinged but somewhat shinny.
Ringed?
marionetteworks 12/5/2012 | 12:37:39 AM
re: Poll: Options Tax Problems Are Common Poll: Options Tax Problems Are Common

Damn this telecom meltdown, before this happened taxes were never a problem for anyone, but now I finally realized how much they suck!
veritas 12/5/2012 | 12:37:37 AM
re: Poll: Options Tax Problems Are Common Have you bought any company stock through your employer's ESPP? (Employee Stock Purchase Plan). The AMT treatment of stock bought an ESPP is even more punitive than options! Worse yet, many more people particpate in ESPPs than options...estimates are at least a million ESPP participants. Here's the hook...your company established a quarterly price for your ESPP...say for an example $20. Sometime during that period your company stock rises...let's say to $35. Your company "buys" your $20 ESPP on the day where the closing price is $35.00. Bad news - within a short period of time (TWO years or less) your stock price declines to $22 and you sell. You bought at $20, sold at $22. You owe tax on $2, RIGHT? WRONG! You owe tax on $15! That's an effective tax rate of roughly 275% BTW - many tax prepares were completely blind-sided by this little beauty.
hitecheer2 12/5/2012 | 12:37:36 AM
re: Poll: Options Tax Problems Are Common ESPP garantees 15% of gain if you sell the shares right away. This is not a bad deal. If you choose to hold, then you are on you own from that point of time.

Some people sell short to protect the shares against market volatility.

In general, ESPP is a pretty saft benefit to employees if handled properly.
BlueFox 12/5/2012 | 12:37:36 AM
re: Poll: Options Tax Problems Are Common But in the mean time it would be very interesting to find out how many folks exercised their 83b elections only to loose it all as start up companies as well as publically traded comanies went belly up or into Chapter 11 protection.

Isn't the money spent purchasing your start-up options via the 83b considered a capital loss if the start-up is out of business? Granted you can only take $3000 a year in capital losses but it is not as if you lost your money and owe AMT on it.
kz1x 12/5/2012 | 12:37:35 AM
re: Poll: Options Tax Problems Are Common Join ReformAMT! http://www.reformamt.org

It's free. These are the only people helping to push legislation through Congress, and there are thousands of members throughout the US and even some overseas.

ISO AMT is simple: the US tax code forces you to pre-pay capital gains taxes, assuming a future gain.

But: what if there IS no gain?

Then, you've pre-paid taxes that WILL NEVER BE OWED. And, worse, you CAN'T GET THE MONEY BACK

... except as a tiny annual credit, which goes DOWN as your income goes down, and ... if you die, it dies with you. There's no mechanism to recover the credit.

Sound like a law that needs fixing to you?

veritas 12/5/2012 | 12:37:34 AM
re: Poll: Options Tax Problems Are Common Since 1997 the rules on selling short against the box got stickey - see "Constructive Sale" rule.
optodoofus 12/5/2012 | 12:37:31 AM
re: Poll: Options Tax Problems Are Common Your ESPP example isn't quite right, but almost. If you sell within two years, then the bargain element - the difference between the price you paid ($20) and the fair market value on the day that the ESPP program bought the stock ($35) - is considered income, and you have to pay tax on it. This is not AMT, but regular tax. However, the difference between the fair market value ($35) and your sale price ($22) would be considered a capital loss. Assuming that you have capital gains that you can apply this capital loss to, you come out OK (or almost OK except for the different tax rates for income versus LTCG). However, if you have no capital gains, you can only write off $3000 of income and then will have to stockpile the capital losses until such time as you have capital gains in the future (or you just write off $3000 year until you use up the capital losses).

I said it before, and I'll say it again. If you don't REALLY know what you're doing, seek professional help. I am not a tax professional, so please don't consider this info gospel when making your own tax decisions.

veritas wrote:

Here's the hook...your company established a quarterly price for your ESPP...say for an example $20. Sometime during that period your company stock rises...let's say to $35. Your company "buys" your $20 ESPP on the day where the closing price is $35.00. Bad news - within a short period of time (TWO years or less) your stock price declines to $22 and you sell. You bought at $20, sold at $22. You owe tax on $2, RIGHT? WRONG! You owe tax on $15! That's an effective tax rate of roughly 275% BTW - many tax prepares were completely blind-sided by this little beauty.
veritas 12/5/2012 | 12:37:30 AM
re: Poll: Options Tax Problems Are Common optodoofus - I stated that I never said that ESPPs were subject to AMT - I can see that I did indeed directly link AMT with ESPP in an earlier post - you are right - technically it is not AMT but certainly has "the look and feel" - my apologies!
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