How can I owe more in taxes than my stock is worth?
July 20, 2001
Subject: just a quick ping – can this possibly be true?
Date: Tue, 9 Jan 2001
My brother who works for a high flying and hard crashing dotcom has a situation that is unbelievable ….
He exercised an option for X0,000 shares at pennies, FMV = 50 in September – $X,000,000 regular income – NQ option.
The company sold something like 28% for witholdings – something like XX00 shares.
The market erased all the value of the stock — down to about $1. So he is holding about $XXX00 in stock. He sold enough to take his $3000 capital loss before year end His w2 still shows $X,000,000 in income — so he owes about 11% more on that income – even though he never saw a nickle of the money. So he has a tax bill that is for about $XX0,000.
I thought that AMT was crazy === this is even worse. How can this be true? This is stealing! Aren’t we supposed to be incented to buy and hold?
Just a yeah or nay would be great.
Date: 9 Feb 2001
Of course this situation is true.
Employees who are dealing with employer stock need to recognize that these are often risky investments. They need to evaluate whether to continue holding employer stock just as they would any other investment.
When an employee exercises a vested non-qualified option, it’s the same as if the employer gave the employee cash that is immediately invested in employer stock. There is no special tax benefit for holding onto the stock except the usual long-term capital gain with the “cost” being the fair market value of the stock at exercise.
So, if you are unwilling to take the risk or have a more attractive alternative investment, SELL THE STOCK!
I’m sorry your brother had this very expensive lesson.