UK resident here: why were employees paying tax on the nominal value of the shares? Is it not possible to structure the compensation so that tax is payable when the shares are sold (capital gains) or on any dividends paid on the shares?
Alternative minimum tax, created in 1969 to target 155 high-income households who were using too many tax loopholes. It was not adjusted for inflation, and it did not anticipate rank-and-file employees receiving stock options.
> Is it not possible to structure the compensation so that tax is payable when the shares are sold (capital gains) or on any dividends paid on the shares?
Yes, but this requires the employee to pre-pay for the shares when they are issued.
Normal tax rules do not consider exercising options to be a taxable event, but AMT rules do. You can exercise options resulting in modest paper gains without them being taxed.
In some cases it might make sense to exercise stock options before you can actually sell them (e.g. if you expect the price to keep going up to save on taxes or if you're leaving the company when you typically only have a limited amount of time to exercise or lose those options).
So in these cases you now own the stock and paid taxes on it, but if the stock price falls drastically after that you might have actually paid more taxes than the stock is worth now.