OohPooPahDoo
Gold Member
- May 11, 2011
- 15,347
- 985
Why stock option deductions for business (Facebook) do not mean net lost tax revenue
Its very simple, follow me.
Company X gives employee Bob a nonqualified stock option package worth $100,000 with strike price $Y.
Over time the value of those options goes up and when Bob comes to exercise them, they are worth $1,000,000. He exercises them on the company - who must either a) buy its own shares on the open market for $1,000,000 + $Y and sell them to Bob for $Y, netting a $1,000,000 loss or b) dilute their shares of stock, issuing $1,000,000 + $Y worth of stock to Bob in exchange for $Y, netting a loss of $1,000,000.
Company X then can claim a loss of $1,000,000 on their tax returns - so the government loses revenue, right?
Not so fast - Bob now has $1,000,000 in profit from the option transaction, which is taxable and most if not all of it will be taxable at %35.
So the tax burden simply follows the profit from Company A to Bob.
Its very simple, follow me.
Company X gives employee Bob a nonqualified stock option package worth $100,000 with strike price $Y.
Over time the value of those options goes up and when Bob comes to exercise them, they are worth $1,000,000. He exercises them on the company - who must either a) buy its own shares on the open market for $1,000,000 + $Y and sell them to Bob for $Y, netting a $1,000,000 loss or b) dilute their shares of stock, issuing $1,000,000 + $Y worth of stock to Bob in exchange for $Y, netting a loss of $1,000,000.
Company X then can claim a loss of $1,000,000 on their tax returns - so the government loses revenue, right?
Not so fast - Bob now has $1,000,000 in profit from the option transaction, which is taxable and most if not all of it will be taxable at %35.
So the tax burden simply follows the profit from Company A to Bob.
