House Passes Employee Stock Options Bill Aimed at Startups
The original point of ISOs was to offer to employees the opportunity to take an economic risk with stock options (by exercising and paying for the stock at the bargain price) while avoiding the tax risk (by generally not recognizing ordinary income from that exercise and being taxed only at the time the stock was sold, and then only as a capital gains tax).<p>AMT has since emerged to devour the value of this benefit. By having to include the value of the spread (difference between exercise price and fair market value of the stock on date of exercise) as AMT income and pay tax on it at 28%-type rates, an employee can incur great tax risk in exercising options - especially for a venture that is in advanced rounds of funding but for which there is still no public market for trading of the shares. Even secondary markets for closely held stock are much restricted given the restrictions on transfer routinely written into the stock option documentation these days.<p>So why not just pass a law saying that the value of the spread is exempt from AMT? Of course, that would do exactly what is needed.<p>The problem is that AMT, which began in the late 60s as a &quot;millionaire&#x27;s tax&quot;, has since grown to be an integral part of how the federal government finances its affairs and is thus, in its perverse sort of way, a sacred cow untouchable without seriously disturbing the current political balance that is extant today.<p>And so this half-measure that helps a bit, not by eliminating the tax risk but only by deferring it and also for only some but not all potentially affected employees.<p>So, if you incur a several hundred thousand dollar tax hit because you choose to exercise your options under this measure, and then your venture goes bust for some reason, it appears you still will have to pay the tax down the road - thus, tax disasters are still possible with this measure. Of course, in optimum cases (and likely even in most cases), employees can benefit from this measure because they don&#x27;t have to pay tax up front but only after enough time lapses by which they can realize the economic value of the stock.<p>This &quot;tax breather&quot; is a positive step and will make this helpful for a great many people. Not a complete answer but perhaps the best the politicians can do in today&#x27;s political climate. It would be good if it passes.<p>Edit: text of the bill is here: <a href="https:&#x2F;&#x2F;www.congress.gov&#x2F;bill&#x2F;114th-congress&#x2F;house-bill&#x2F;5719&#x2F;text" rel="nofollow">https:&#x2F;&#x2F;www.congress.gov&#x2F;bill&#x2F;114th-congress&#x2F;house-bill&#x2F;5719...</a> (Note: it is a <i>deferral</i> only - if the value evaporates, you still owe the tax).