Trump's Full Court Press on Tax Reform

[geezer]

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?

i can't figure out why you seem to have this idea that an employee stock option is like a dollar, or a car, or a check. It's not. It's a contract that says you can buy something at some time in the future for a set price. That's it. No one can know the value because the value cannot be determined at the time if issue. It can't be. The net value to the recipient can ONLY be determined at the time that it becomes liquid.

As for how those decisions are made, I'm guessing you've never been in a startup environment

[Zarathud]

In theory, a vested option is an accession to wealth and a gain from dealing in property. That's the very definition of gross income in the tax law.

Determining the value may be difficult, but it could be measured at the time it vests or at a future date (such as exercise). Even if there is no current market, a principled approach can be used to determine (or estimate) value. If there is a loss from that value, that gain or loss from the initial taxable event can be reflected on an income tax return. But in order to figure that out, you have to take a principled approach to the tax law.

That's largely absent from this tax bill. For example, the intended tradeoff for paying an estate tax is a reset (or "step up") of the tax basis in inherited assets. The initial House bill would take away the cost but leave the benefits. There are other examples where the burden is left but the benefits taken away, like the repeal of the deduction for state and local taxes. The only consistent thing is the benefit to Republican donors.

[RunningMn9]

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

This isn't complicated.

They have no FINANCIAL VALUE. I can't sell them. I can't do anything with them. Some day in the future, I can use them to buy stock at a guaranteed price, which I may or may not even be able to do, depending on the future value of the company's stock. Why was I getting them? Because they *MIGHT* some day have financial value. It's called an employee *incentive*. I wasn't given them in lieu of salary or anything else. They were what was known as "golden handcuffs" because they took four years to vest, and you had to stay with the company to get them and exercise them (as noted, they expire almost immediately upon separation from the company).

That is entirely different from a call/put, which is a fungible commodity in and of itself.

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

No, as a non-grantee, you wouldn't be able to do the same thing. As a non-grantee, you wouldn't be able to buy calls with a four year time horizon, that aren't yours for four years, and at which at no point in time can you buy or sell them. Employee stock option grants aren't calls.

They sound like calls, which is apparently confusing the shit out of you.

You were paid them.

Which is why, when I exercised the options, and the value was easily determined, I paid income tax on them (rather than capital gains). No one is arguing that I wasn't given something. We are pointing out the stupidity in trying to assess and tax their "value" long before the value is known, which complicates matters, rather than simplifies them. I'm not arguing that we shouldn't tax the gains made on an employee stock option grant. I'm simply pointing out that the proper time to tax them is at the point when they are exercised and their value is realized (and set).

[Paingod]

I don't know if this has been posted here yet...

[noxiousdog]

In theory, a vested option is an accession to wealth and a gain from dealing in property. That's the very definition of gross income in the tax law.

Determining the value may be difficult, but it could be measured at the time it vests or at a future date (such as exercise). Even if there is no current market, a principled approach can be used to determine (or estimate) value. If there is a loss from that value, that gain or loss from the initial taxable event can be reflected on an income tax return. But in order to figure that out, you have to take a principled approach to the tax law.

That's largely absent from this tax bill. For example, the intended tradeoff for paying an estate tax is a reset (or "step up") of the tax basis in inherited assets. The initial House bill would take away the cost but leave the benefits. There are other examples where the burden is left but the benefits taken away, like the repeal of the deduction for state and local taxes. The only consistent thing is the benefit to Republican donors.

I'll just quote the tax attorney and retire from this discussion.

[Carpet_pissr]

I don't know if this has been posted here yet...

Fantastic, thanks for sharing. Also, I had no idea Ted Kennedy was still alive?!

[El Guapo]

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

This isn't complicated.

They have no FINANCIAL VALUE. I can't sell them. I can't do anything with them. Some day in the future, I can use them to buy stock at a guaranteed price, which I may or may not even be able to do, depending on the future value of the company's stock. Why was I getting them? Because they *MIGHT* some day have financial value. It's called an employee *incentive*. I wasn't given them in lieu of salary or anything else. They were what was known as "golden handcuffs" because they took four years to vest, and you had to stay with the company to get them and exercise them (as noted, they expire almost immediately upon separation from the company).

That is entirely different from a call/put, which is a fungible commodity in and of itself.

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

No, as a non-grantee, you wouldn't be able to do the same thing. As a non-grantee, you wouldn't be able to buy calls with a four year time horizon, that aren't yours for four years, and at which at no point in time can you buy or sell them. Employee stock option grants aren't calls.

They sound like calls, which is apparently confusing the shit out of you.

You were paid them.

Which is why, when I exercised the options, and the value was easily determined, I paid income tax on them (rather than capital gains). No one is arguing that I wasn't given something. We are pointing out the stupidity in trying to assess and tax their "value" long before the value is known, which complicates matters, rather than simplifies them. I'm not arguing that we shouldn't tax the gains made on an employee stock option grant. I'm simply pointing out that the proper time to tax them is at the point when they are exercised and their value is realized (and set).

This is somewhat of a pedantic and theoretical argument because I don't think anyone here (including ND) actually supports the tax change here that the GOP is planning / contemplating. But anyway, to pedant on, there are basically three points at which one could decide to impose the tax on options like this:

(1) Immediately upon receipt (e.g. now) - I don't think anyone (even the GOP tax bill) supports taxing options pre-vesting. They do have *some* value at this point - basically the possibility that the options will vest at a value below the then market price - and that value could be determined by a model of some type. However, that's unnecessarily complicated, and it would be at least mildly obnoxious to tax the options at a point at which they cannot be converted to cash.
(2) Upon vesting - I think this is the change that the GOP is contemplating. It's more logical / defensible, because the value of the option (if any) is generally going to be easier to determine (there's more likely to be a market value set by existing transactions in the underlying stock with which you can compare the strike price), and because since the options can be potentially exercised / sold and converted into cash (if the options are worth anything) in order to pay any tax due.
(3) Upon exercise / sale - the current system. I agree that everything else aside, taxing at this point is the simplest way to do it, and it is somewhat ironic because one of the nominal goals of this bill is purportedly (but not really) to simplify taxes.

I agree at that at the end of the day #3 is probably the most sensible place to impose the tax. All I'm saying is that #2 (or somewhere thereabouts) is also a logical and defensible point at which to impose a tax, if you have a well thought out and crafted way of dealing with the practical complications of taxing at that point. Which the GOP almost certainly does not at this point.

[Zaxxon]

I mean, I guess it has to be said again: choice 3 in your list is the only way to 'determine the value.' Everything else is nothing more than a guess (or, in the case of #2, largely a way to force many of the option-holders to exercise immediately upon vesting since they're unlikely to otherwise be able to pay the tax hit). A guess that will be wildly incorrect much of the time, would impose potentially very large costs upon those who receive these options well before they ever gain anything tangible from them--if in fact they ever do gain anything tangible--and/or would remove the 'option' from the option by de-facto forcing folks to exercise immediately upon vesting rather than when they deem it to make the most sense (eg after a known upcoming major product launch).

RM9's 'won a car' analogy is apt, IMO. Taxing these as though you've received something tangible before you receive anything tangible is nonsensical.

Or maybe I'm just misunderstanding this completely, which is always a possibility.

[El Guapo]

I mean, I guess it has to be said again: choice 3 in your list is the only way to 'determine the value.' Everything else is nothing more than a guess (or, in the case of #2, largely a way to force many of the option-holders to exercise immediately upon vesting since they're unlikely to otherwise be able to pay the tax hit). A guess that will be wildly incorrect much of the time, would impose potentially very large costs upon those who receive these options well before they ever gain anything tangible from them--if in fact they ever do gain anything tangible--and/or would remove the 'option' from the option by de-facto forcing folks to exercise immediately upon vesting rather than when they deem it to make the most sense (eg after a known upcoming major product launch).

RM9's 'won a car' analogy is apt, IMO. Taxing these as though you've received something tangible before you receive anything tangible is nonsensical.

Or maybe I'm just misunderstanding this completely, which is always a possibility.

I mean, it's just not true that the only way to determine the value of a vested option is to sell it. People calculate the value of options all the time - that's a big part of how people determine when to buy and sell publicly-traded options. Options will vary in how hard it is to determine a value for it, of course, but (for example) the value of a vested non-restricted option to buy Amazon stock at $10/share would be pretty easy to set. In some ways it is like winning a car - like an Amazon option, you don't know for sure how much the car is ultimately 'worth' in a real sense until you try to sell it, but (assuming that it's a functioning widely sold car) there is plenty of market data available to pretty readily set an approximate expected sale value.

[Zaxxon]

Yes, there are plenty of examples where it's not that hard--and your choice of Amazon, a two-decade old public company, is one. But for a large category--newish start-ups, for example, which is what I've been picturing so far--it's just a guess. No one knows in the early stages whether a particular company is going to zero or Amazon levels, and my point is that trying to put a number on something like that, and then immediately tax folks on that number when it may be several years before they receive any tangible proceeds, is nuts.

[El Guapo]

Yes, there are plenty of examples where it's not that hard--and your choice of Amazon, a two-decade old public company, is one. But for a large category--newish start-ups, for example, which is what I've been picturing so far--it's just a guess. No one knows in the early stages whether a particular company is going to zero or Amazon levels, and my point is that trying to put a number on something like that, and then immediately tax folks on that number when it may be several years before they receive any tangible proceeds, is nuts.

Oh, it's definitely a complication (and a reason to not tax at that point). But it's not an issue that's necessarily insurmountable. For example, you could set the value based on a comparison of the option strike price and the sale price of the last X (say, 10) publicly-reported transactions in the underlying stock. Where the stock does not have that many publicly-reported transactions (your start ups), make the value of the option presumptively zero. Basically, treat options in the stock of publicly-traded companies different than options in the stock of start-ups.

[noxiousdog]

Yes, there are plenty of examples where it's not that hard--and your choice of Amazon, a two-decade old public company, is one. But for a large category--newish start-ups, for example, which is what I've been picturing so far--it's just a guess. No one knows in the early stages whether a particular company is going to zero or Amazon levels, and my point is that trying to put a number on something like that, and then immediately tax folks on that number when it may be several years before they receive any tangible proceeds, is nuts.

Well, that's part of the deal. If done correctly, it closes opportunities for established companies to enrich their executives with tax free income while still allowing options in startups. When valuing startups, at grant or vesting, the value is likely going to be close to zero. If they wind up with value, they would then be taxed at the capital gains rate. In established companies, the value is likely higher and should be considered income and any gains post vesting would be then taxed at capital gains.

[Zaxxon]

I'd be fine with exceptions to close loopholes like ND's--immediately calling for taxable 'income' when established companies grant their already-likely-to-be-very-wealthy execs additional options. I just think that trying to go about this for the class as a whole is bonkers.

[El Guapo]

I'd be fine with exceptions to close loopholes like ND's--immediately calling for taxable 'income' when established companies grant their already-likely-to-be-very-wealthy execs additional options. I just think that trying to go about this for the class as a whole is bonkers.

That's pretty much where I am. The basic point is that this type of change done in the right ways in the right areas could make sense. That's probably not what's going to happen in the current bill, but some type of movement in this direction under the right leadership could be the right thing to do.

[RunningMn9]

I mean, it's just not true that the only way to determine the value of a vested option is to sell it.

It's the only valid way of calculating the *actual* gain to the employee.

Some maths:

Employee A is granted 2500 stock options for XYZ, Inc with a 4-yr vesting schedule (25% per year), and an expiration date of 8 years (from the grant date), which also expire 30 days after separation. The strike price is $5 per share (in my experience, the strike price has always been set by the closing price of the stock on the day that the Board approved the grant).

On the first year anniversary, the stock price is $7 per share. Since 625 shares have now vested, Employee A owes federal income tax on $1250. On the second anniversary, the stock price is $12 per share. 625 shares have vested on this date, so Employee A owes federal income tax on $4375. What about the stock options that vested the year before at $7 that Employee A didn't exercise? Does she owe federal income tax on the additional $3125 that those options are "worth" on the second anniversary date? On the third anniversary, the stock has taken a hit and is now trading at $4. Employee A gets to take a loss on the -$625 "worth" of options? What about the first 1250 options that are now worthless that they already paid taxes on? On the fourth anniversary, the stock has recovered and sits at $6, when the remaining options vest. That's federal tax on $625, and whatever we have to do with the other 1875 options that have been treated differently because they vested at different times.

Things seem to be going well for the XYZ, so Employee A holds onto the options. Then Lehman Brothers fails, and the stock market crashes in the span of a day, and while she tried to sell them she realized that you can't do that without a margin account which takes too long to setup and the stock falls to $2.89 per share and all of her options are now worthless. Oh, and she's laid off while the stock is depressed, and all 2500 options expire.

You *could* do this. It would just be monumentally stupid to force Employee A to have to pay income taxes on $5625 of income that the employee never received.

What if in this scenario, the employee held the options for a further three years (selling seven years after the original grant), at $17 per share? You've now got four lots of options that have been taxed one or more times over the past seven years, that all have to be treated differently when trying to calculate how much tax is owed.

That's scenario #2 described above.

Scenario #3 is ($17 - $5) * 2500 = $30,000. Now pay income tax on it. Done.

The idea that this is a problem that needs solving is preposterous.

[El Guapo]

Bringing health care into the bill is probably going to help things a lot.

[RunningMn9]

The purpose of employee stock option grants is employee retention. The proposed change kills that. It defeats the entire purpose which is to retain the employee and give them a vested interest in the performance of the company.

They aren't designed to replace bonuses or salary. That a limited number of companies have tried to use it as a loophole, this isn't a problem that needs solving. Giving an executive options doesn't break the system. When they exercise them, tax them. This isn't complicated.

[Zarathud]

Skimming but another option is to allow tax deferral until exercise but impose a higher rate of tax. One of the big problems with the current system is the incentive to carve off options/profits interests that can pay off much later and qualify for capital gains tax rates -- while acting for purposes of deferred compensation or retention, which should really be taxed at ordinary income/wage rates.

One massive inequity that will only be exacerbated by the Trump tax reform is the high tax on wage earners compared to the low tax on capital income. It's going to penalize those who work to benefit those who profit without work. That's bad long-term for the economy and for democracy.

[msteelers]

Bringing health care into the bill is probably going to help things a lot.

I get why the GOP would want to do it, but they desperately need to get this tax bill to pass. That can only get harder with the inclusion of healthcare.

Just a couple of months ago I would have said that this means they are so confident they can get something done that they are going to shoot for the moon. Now, after showing time and time again that they are inept at governing and getting things passed, I think it just says they are bought hook, line, and sinker by their donors.

[RunningMn9]

Skimming but another option is to allow tax deferral until exercise but impose a higher rate of tax. One of the big problems with the current system is the incentive to carve off options/profits interests that can pay off much later and qualify for capital gains tax rates -- while acting for purposes of deferred compensation or retention, which should really be taxed at ordinary income/wage rates.

I am almost certain that I paid income tax when I exercised the stock options, but if I didn't, then I would certainly support doing it. Aren't short term CG treated as income? Since the exercise results in you holding the shares for 0.0 seconds, you can't get it at the LTCG rate. Unless you physically bought the shares and didn't sell them for at least 18 months or something like that.

[The Meal]

IIRC, there are exercise-and-hold and exercise-and-sell choices. I may be mistaken, but I don't believe I was taxed at my income rate when exercising and holding. It's quite possible I was, but the company had some sort of make-whole benefit to make it transparent on my end.

[Zarathud]

It depends on how they're granted, the terms, and the industry. Capital gains are reported as income but pay lower rates.

Carried interests granted to fund managers is what should be fixed and this bill doesn't touch it yet. Instead, the priority is to screw you not the wealthiest.

[El Guapo]

One massive inequity that will only be exacerbated by the Trump tax reform is the high tax on wage earners compared to the low tax on capital income. It's going to penalize those who work to benefit those who profit without work. That's bad long-term for the economy and for democracy.

This is the yet to be fully tapped political potential of this bill for democrats, especially if it winds up passing. There are a lot of provisions that penalize working and reward capital and receiving money passively (including the estate tax). And the provisions that penalize working impact almost everyone (including upper middle class people). "Tax cuts for the extremely wealthy idle rich paid for by increased taxes on all the working people" is a pretty powerful and emotional message.

[El Guapo]

So....not a great start.

[Zaxxon]

I like that the cart he hitched his horse to is not that it benefits biz over individuals or wealthy over less-wealthy, but that one type of business gets the gold while other types of business do not get as much.

[Pyperkub]

So, yeah. this is looking more and more like a massive giveaway to the rich and corporations which will be paid for by tax payers:

1. Middle Class Tax cuts to be temporary.

They essentially had two choices: They could slap an expiration date on the proposal’s large corporate tax cut—from 35 percent down to 20 percent—or they could sunset the provisions benefitting individuals.

For now, Republicans are siding with businesses, keeping the lower corporate rate permanent while setting nearly all of the individual tax cuts to expire in eight years, at the end of 2025.

2. CPI Chain linking likely to be a Middle Class Tax boost:

Tucked into Republicans’ tax overhaul bill is a technical tweak to how inflation is measured. The change is designed to hold down the deficit, but over time it becomes a significant tax increase that hits many of the same middle-class households who start out as the plan’s beneficiaries.

3. Corporate tax cuts are not linked to actual wage growth/job growth in the US.

An awkward — but extremely telling — moment arose yesterday at a Wall Street Journal “CEO Council” event ...

...“If the tax reform bill goes through, do you plan to increase investment — your companies’ investment — capital investment,” and requests a show of hands. Only a few hands go up, leaving Cohn to ask sheepishly, “Why aren’t the other hands up?”...

...The reason few hands are raised is there’s little reason to believe that the kind of broad corporate income tax cut Republicans are pushing for will induce much new investment. A tax plan that was specifically designed to reduce taxation of new investments might do that. But most corporate profits are, of course, the result of activities undertaken in the past. So a broad cut in corporate tax rates is a windfall for what in tax policy jargon is called “old capital,” as well as for monopoly and quasi-monopoly rents and various other things that have nothing to do with incentivizing new investment.

4. Stock Option taxes

5. Health Care mandate gone

A new report from the non-partisan CBO found that repealing the individual mandate would increase premiums at least 10 percent every year for the next 10 years.

6. Deduction elimination of Medical/Education/SALT deductions.

7. Mortgage interest deduction limitations

the list goes on. Including the Citiizens United provision about 501(c)3's which snuck into the House version at one point (not sure if it's still there).

Say hello to your shit-sandwich America.

[Kraken]

This is the yet to be fully tapped political potential of this bill for democrats, especially if it winds up passing. There are a lot of provisions that penalize working and reward capital and receiving money passively (including the estate tax). And the provisions that penalize working impact almost everyone (including upper middle class people). "Tax cuts for the extremely wealthy idle rich paid for by increased taxes on all the working people" is a pretty powerful and emotional message.

Only to the extent that people believe it. Liberals already do. Conservatives insist on believing that the extremely wealthy idle rich will trickle on them. It is an article of faith, unshaken by real-world results (like Brownback and KS). Even if you can show them that this is a giveaway to the superrich, good luck convincing them that that's a bad thing.

Republicans always crash the economy. The only questions are how and when. At least now they're showing us their playbook.

[malchior]

Republicans always crash the economy. The only questions are how and when. At least now they're showing us their playbook.

In this case it'll be NJ or IL defaulting whenever the next recession hits because this will suck billions out of NJ to begin with. It will possibly be a huge disaster that they can't save by throwing a trillion dollars at the banks.

[noxiousdog]

It depends on how they're granted, the terms, and the industry. Capital gains are reported as income but pay lower rates.

Carried interests granted to fund managers is what should be fixed and this bill doesn't touch it yet. Instead, the priority is to screw you not the wealthiest.

And, let's be real, option profits should not be subject to capital gains anyway. It should be income. The point of capital gains is to lower the bar for investment, not to make people pay less taxes.

At least that's the theory.

[pr0ner]

Local DC area radio are playing ads about how the tax cuts are really tax increases on the middle class due to the double taxation that would follow the elimination of the SALT reduction.

The ad also mentions that corporations get to keep their SALT deductions. Because of course they do.

[Rip]

It depends on how they're granted, the terms, and the industry. Capital gains are reported as income but pay lower rates.

Carried interests granted to fund managers is what should be fixed and this bill doesn't touch it yet. Instead, the priority is to screw you not the wealthiest.

And, let's be real, option profits should not be subject to capital gains anyway. It should be income. The point of capital gains is to lower the bar for investment, not to make people pay less taxes.

At least that's the theory.

I would say income when exercised and capital gains on what the increase in value is when sold.

[Zarathud]

Another neglected tidbit is that Mr. America First! is about to let US Corporations get away with not paying tax on non-US income. The reason the US tax code makes US created corporations pay US tax on worldwide income is because they benefit from US legal protections and treaties. So now these "people" will get all of the treaty benefits, but none of the cost for being born in the USA.

This is a huge shift and once we change, it may no longer be possible to change back. I expect it will become a huge loophole.

[malchior]

Sherrod Brown brought in a tax expert that said that the loophole also incentivizes outsourcing. Basically the theory is why pay tax at all? Move the job overseas. Establish ownership in a low tax haven, earn money overseas and then not have to pay taxes back home. It will obviously bring some money back to the U.S. but it is hard to not see that this would be a net negative long-term.

[geezer]

It depends on how they're granted, the terms, and the industry. Capital gains are reported as income but pay lower rates.

Carried interests granted to fund managers is what should be fixed and this bill doesn't touch it yet. Instead, the priority is to screw you not the wealthiest.

And, let's be real, option profits should not be subject to capital gains anyway. It should be income. The point of capital gains is to lower the bar for investment, not to make people pay less taxes.

At least that's the theory.

I would say income when exercised and capital gains on what the increase in value is when sold.

You want me to pay income tax on a good that I buy?? So if I *buy* a house, I should pay income tax on that house and then pay tax again if I sell it for a profit?

[GreenGoo]

When it's given to you in exchange for providing labour to your employer, yes, of course.

The argument is what is its worth at the time you receive it, if any.

[geezer]

Everyone understands that when you're given an employee stock option you're not actually given shares, right? You're given the opportunity to *buy* shares. Hell, until such time as you're vested, you can't even do that.

[noxiousdog]

Everyone understands that when you're given an employee stock option you're not actually given shares, right? You're given the opportunity to *buy* shares. Hell, until such time as you're vested, you can't even do that.

Nobody has mentioned anything about pre-vesting.

And while what you say is technically true, you can buy and sell the shares at exercize without putting up a dime of your own capital everywhere that I've been a part of.

[RunningMn9]

I’m not sure everyone understands that. I don’t know how many people here have directly dealt with them before. I have no trouble treating the proceeds as income vs capital gains - when the sale takes place.


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[noxiousdog]

It depends on how they're granted, the terms, and the industry. Capital gains are reported as income but pay lower rates.

Carried interests granted to fund managers is what should be fixed and this bill doesn't touch it yet. Instead, the priority is to screw you not the wealthiest.

And, let's be real, option profits should not be subject to capital gains anyway. It should be income. The point of capital gains is to lower the bar for investment, not to make people pay less taxes.

At least that's the theory.

I would say income when exercised and capital gains on what the increase in value is when sold.

Why? An option has no equity. It's a lottery ticket. Gambling winnings are taxed as income.

The only reason options are treated as capital gains is because rich people use them and have made tax law in their favor.

[noxiousdog]

I’m not sure everyone understands that. I don’t know how many people here have directly dealt with them before. I have no trouble treating the proceeds as income vs capital gains - when the sale takes place.


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I'm pretty sure Zarathud has more experience with this than anyone.