Canada has a good rule for this: There's a special class of company called Canadian-Controlled Private Corporation (CCPC). When exercising options issued by a CCPC, the tax burden is deferred until disposition.

https://www.collinsbarrow.com/en/cbn/publications/taxation-o...

And the company going belly up (or an acquisition scenario where common shares are worth zip) is a disposition that will make the tax due.

You can however use the Allowable Business Investment Loss deduction to deduct half, and if you hold the CCPC shares for two years, you can deduct the other half. So the danger zone is the two year window after exercising.

Erroneous comment referring to legacy tax rules. I've edited it away for clarity.

The CCPC status is grandfathered in if your options were granted when the company was a CCPC.

I dont understand this. if they're worthless & you can't sell, why do you pay tax as if the stock is worth $90?

Edit: Can someone point me to IRS docs? or blog explaining?

Honestly, I think the best answer is just "Because the tax code says so". It really doesn't make sense, you should be taxed on the sale of stocks, not the purchase, but the tax code as it currently stands doesn't work that way.

Because they're not worthless, they're just not liquid.

I wish one could just give a fraction of your stock equal to your marginal tax rate to the IRS, perhaps plus a small fee.

This is maybe rare, but there's at least 1 late-stage startup that gives RSUs and allows you to do this in practice. Where my friend works, they give you the option to either pay your own taxes when your RSUs vest, or they will purchase an amount of RSUs from you to cover your tax bill. Seems like a really good deal for the employees. I don't know if this can translate to options in any way, I'm only familiar with RSUs.

The IRS wants to be paid in cash, not illiquid stock.

Right, and they also want to tax income, not accumulation of untradeable shares. They seem to want to treat it as income for purposes of determining tax liability, but not income for purposes of satisfying the very same tax liability. That's like trying to have your cake and eat it too.

Reminds me of California's debt crisis and "Hey! How dare you turn down state IOUs as payment? These are every bit as good as cash. ... Wait, you want to pay your state tax bill with state IOUs? Get that crap away from us!"

The rules are definitely not fair but that’s beside the point.

Beside the point of the GGGP's wish that tax liability on an unsaleable asset could be satisfied in kind?

I thought GGGP’s post was to propose a solution that worked under current rules.

Yeah, it would be great also if supermarkets would accept a fraction of the stock, in return for baby food. But I'm not sure why they would be willing to do that.

Sufficiently advanced illiquidity is indistinguishable from worthlessness.

But by the time they become liquid (if they ever do), they could be approximately worthless, or worth much less than they were when you paid tax.

an unintended consequence of the Alternative Minimum Tax

This is only an AMT issue when it comes to Incentive Stock Options which nominally don't have this issue.

For regular (Non-qualified) options, current value - strike is considered ordinary income when you exercise.

This is if you hit AMT, if you have ISOs. One positive for startup employees of the GOP tax bill is that it seeks to repeal AMT for individuals.

If you have NQOs, this tax always happens.

The Senate tax bill does not eliminate personal AMT, it merely "raises the threshold slightly".

This could be fixed in reconciliation, but with the way things are going, I wouldn't be surprised if the house just votes for the senate bill.

https://www.washingtonpost.com/news/wonk/wp/2017/11/30/what-...

Unless they're also planning to repeal the $100K limitation on ISOs (after which they're all treated as NQOs) this will only be a modest benefit.

Is that the senate version?

Also wasn't there a further amendment to that after lobbying to exempt private company shares from this? I recall fred Wilson writing something to that effect.

woah there, you committed the cardinal sin of describing something the GOP is doing as positive for people on the West Coast

Which is why, in general, you shouldn’t exercise them unless the company is sold/goes public.

Could be worse; in Ireland I’d pay a little over 50% on my options if I exercised them. Which is why I don’t.

I certainly wouldn’t be interested in taking a job in a private company where options were a significant part of compensation.

EDIT: Just noticed from the article, Uber employees had to exercise within 30 days. Wow. 7 years seems to be normal in this country.

7 years wasn't normal until Pinterest did everybody a solid and set that precedent:

https://medium.com/@michaeldeangelo/unlocking-the-golden-han...