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Comment by VRay | Hacker News Reader

Ah, I’ve worked with a lot of people who didn’t hit it big with stock options and suffered ruinous tax liabilities in some cases.. Zero is probably too little, but if you’re being paid way under-market in cash and having to dip into that to exercise options and pay taxes, zero might actually be a good middle ground between the best and worst cases

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There may be cases I'm missing, but afaik you never *have* to suffer ruinous tax liabilities from stock comp if you're willing to just eat the gains as raw income (making the (often smart) gamble to hit LCTG is what will get you in trouble).

I hope it's not "ruinous", but I think the other "gamble" that can play out badly is when you exercise and incur a large AMT liability for the year you exercise, but the company may still be years from exit.

It is very difficult to run into ruinous tax problems with publicly traded companies, but it's possible. There's a delay between the vest date and when you can actually sell your shares. Normally this is just a few days, but if something dire happens your stock can still tank in this window. If $100k of RSUs vest and then drop to $0 in value before you can sell, you have $100k of income to pay taxes on, and can only credit $3k of your capital losses per year towards normal income.

It is very easy to run into ruinous tax problems with privately traded companies. If you exercise options you have to pay taxes on the difference between the strike price and the current fair market value, and in exchange you've gotten something which is very difficult to sell. You can avoid ever having any tax problems by just never exercising your options until a liquidity event, but that often means letting them expire unexercised.

Yikes this sounds like a terrible deal for an employee. How long as these expiry dates? So if I get options in a company at a high valuation and pay taxes on the fair market value at that time and the valuation dips by the time I am able to exercise them, I have effectively lost money? Sorry, just trying to figure this out.

You don't ever pay taxes until you exercise options. Options cost you nothing as long as they remain vested options.

Mmm, I've always had the option to "withhold shares" for tax obligations for vesting RSUs; I don't think I've had a delay.

> If you exercise options you have to pay taxes on the difference between the strike price and the current fair market value, and in exchange you've gotten something which is very difficult to sell.

I am suggesting that you can choose to never exercise your options until there is a liquidity event and you can same-day-sell for raw income. This does require you to stay at the company until the liquidity event though.

There’s also the 83-b election. Which allows prepaying tax on the value of the stock at the time of grant.

https://www.investopedia.com/terms/1/83b-election.asp

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