The questions is ... would the same taxation be applicable in the reverse direction ? Say SF taxed you on big paper gains last year, your startup crashed and burned this year. Can you get a big refund ?

If not, then it would suggest a new avenue for arbitrage: trading stock in dead startups merely to offset gains in still functioning entities.

Intentionally overpaying for dead/dying/underwater company options/equity, to create offsetting losses, would save less in gains taxes than the new losses taken on. And, there's no indication a company could deduct investment losses elsewhere against this particular purported 'payroll expense'.

Company X issues a stock option and records the grant, employee exercises the option and Company X is required to pay 1.5% of the gain defined as the difference between the exercise price and the fair market price at the time of exercising) as tax when its exercised. This 'paper' gain is subject to the same taxes it would seem as AMT which has a similar "your liable for the tax even if you didn't get the gain" pain for tech employees.

Restricted stock would no doubt be taxed at issue time, I would be surprised if it wasn't already but I'm not an accountant.

That's somewhat like the reasoning of the SF payroll law – though the tax/withholding is from the funds of, and for the liability of, the (possibly-former) employee, rather than the company itself. Still, the SF law is more analogous to current treatment of NQSOs than I'd realized, using the same spread that generates employee ordinary income tax as the basis for the company payroll tax.

So not quite as unprecedented and insane as I'd thought, though still a mess for startups compared to less-taxing jurisdictions.