http://secfi.com

This is a slightly longer way of saying I'm not totally sure how what you're saying invalidates what valzam said: as far as the IRS is concerned, you did realize gains (you got something of value), just not on anything "liquid," hence AMT. Perhaps they (IRS) use different terms, but that's basically what's happening.

All of this to say, I think what you're saying is a much more precise way of saying what I was trying to get at. :)

>> If you hold actual stocks, there is no tax bill until you sell these to realize the gains

There are taxes to be paid as soon as you get the stock. If you are at google - have you noticed the number of RSUs which hit your schwab account are less than those which vested according to that chart in your schedule? That's taxes being withheld. The stock vesting is considered income at that moment and taxed as such.

(There is also a less important amount of tax due - by more ancient employees - which is about options.)

EDIT: That being said, I think it would be reasonable to contemplate regulations that prevent private companies from blocking secondary market sales if they offer stock options/RSUs to employees.

Let's hit the presses: tech startups hate engineers that think of edge cases

Either that, or IRS not consider the exercise as taxable until those conditions imposed by the company preventing secondary sale are lifted.

It's like taxing lottery tickets on potential win prize.

They are not unless you exchange them for legal _money_. Not stock.

>As long as you don't exchange them for the prize (the actual stock) you are not taxed.

Stock is not the prize - it's worth nothing alone, especially if you can't exchange it for mone. For some reason you don't tax unrealized gains on a stock you already owned, yet do the same for illiquid ones.

>When you do, you have to pay tax on the difference between how much the options cost and the value you get back.

And if you just taxed "at the end" when someone sells the stocks, you'd gain the same amount of money - difference between stock value and 0 - just in a different moment of time.

What I propose is logical and it's how it works in Poland.

(Disclaimer: not advice of any kind)

1) $1m in cash

2) $1m in stock

3) an option grant to buy 1m shares at $0.000001. Each share has a FMV of $1.

Without AMT, you could always take (3) and they would get $1m of stock for $1. Tax free.

The difference is that they wouldn't be taxed until the gains were realized not when they were imagined on paper.

That gap between strike price and FMV is much more like compensation than it is an investment.

It’s tempting to think that we should just tax cash income, but that introduces tax avoidance incentives like being paid in assets instead of cash, unless it’s paired with a corporate income tax.

If you can't sell them on a market (as the stocks are before IPO) they should not be taxed. At the very least, it's like that in Poland. Not that a lot of companies offer stock compensation here.

An employee is compensated with *contracts* to buy stock. Those contracts *themselves* are valued at the strike price, i.e. an employee is accounted to gain ${strike-price} worth of value.

At some point said employee decides to exercise said option contracts, i.e. convert contracts to stock. At the moment of conversion stocks are worth x and ${strike-price} previously paid to employee magically turns into x.

You can either think that employee gained `x - ${strike-price}`, or that employee was previously taxed on ${strike-price} and tax base was adjusted to x. In any case there is income equal to `x - ${strike-price}`.

How are those gains if you're explicitely forbidden to turn those gains into legal tender?

You'd get same tax when IPO hits - just without that earlier step.

It's just the it realizes it into an illiquid asset whos price is imaginary nonsense. The problem of imaginary prices is one of the reasons that we don't tax unrealized gains, but it can still arise when the gain is realized if its realized into something illiquid.

For ex: Stripe has marked itself down ~50% over the last year. Suppose you think the haircut should be more like the 70% comps like SQ and PYPL have taken, and build that into the X%. Then on top of that loss buffer, you prudently demand an illiquidity premium and a profit margin. That arithmetic doesn't leave much room for the employee to retain any stock.

I would think banks would do this again? But perhaps with a longer IPO window? Like the banks that would do this would also likely participate in the IPO anyways ...

Bankish Corp floats you the tax bill at some mutually beneficial interest rate, and in return gets a signed repayment guarantee for when you can actually cash out?

But I'm deeply ignorant of that world so may be making this much more complicated than it actually is.