Does anyone have experience with ISO”s?” (Incentive Stock Options)

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malloc
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Does anyone have experience with ISO”s?” (Incentive Stock Options)

Post by malloc »

So, as I understand it, GOPRO gave ISO's to reward their employees Employees exercised the options, and realized a huge gain as soon as they owned the stock. In the eyes of the IRS, they owed a huge tax bill due to the AMT (Alternate Minimum Tax). But then the stock tanked before they sold it - and they were way in the hole, with no cash to pay the AMT!

Having ISO's in a company would incline one to “de-risk” quickly, because they are way too concentrated in one asset and need to diversify.

Finding a “fee only” advisor to help navigate this process is remarkably difficult.

Does anyone have any experience with this situation, or know a good resource?
newinvestor84
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Re: Does anyone have experience with ISO”s?” (Incentive Stock Options)

Post by newinvestor84 »

The book “Consider your options” by Kaye Thomas has good coverage of ISO tax issues, and is up to date.
evestor
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Re: Does anyone have experience with ISO”s?” (Incentive Stock Options)

Post by evestor »

There are many folks on this board with lots of experience here...if you post what questions you have or scenarios you are considering we can help.

The scenario you frame is one of many which lead us to advise people to be very, very careful when doing an exercise & hold. Frankly this is why many don't exercise and hold and instead just keep the option and only exercise when they are ready to sell.

EDIT: I should add, your accountant should be a good resource to talk to about this. If you don't have one this might be a good excuse to get one! They would know your financial situation in detail and many are very familiar with stock option tax dynamics. In fact, this would be a good criteria to use in selecting an accountant (among others, of course).
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HanSolo
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Re: Does anyone have experience with ISO”s?” (Incentive Stock Options)

Post by HanSolo »

malloc wrote: Tue Oct 12, 2021 11:37 pm Does anyone have any experience with this situation, or know a good resource?
Yes, I experienced it. This happened after the dot-com bust. Many people were blindsided because they didn't know about this tax anomaly until it was too late and they were filing their returns the next year. Some of them lost their house, or worse. There was a grass-roots effort called ReformAMT, to get some relief at the Federal level (i.e., to refund the stored AMT credits), which eventually succeeded (after a long, hard slog of lobbying). But that relief was a one-time thing. Now, people just better know about it, or else they may run into the same trouble (I guess... I'm not a lawyer or tax advisor). I think the best thing is to always cash out ISOs (same-day-sale). If for some reason you feel you must hold the shares, maybe a "costless collar" would be helpful (ask your broker and/or tax advisor).

For some historical perspective on how people were affected by AMT treatment of ISOs, see:

https://www.heartland.org/news-opinion/ ... ncial-ruin

https://www.mercurynews.com/2008/11/10/ ... h-the-amt/
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Tamarind
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Re: Does anyone have experience with ISO”s?” (Incentive Stock Options)

Post by Tamarind »

Yep. That's a bad but all too common scenario, especially if the lockup period is long.

Here's another one. I once worked at a public company that had suffered a major blow to the stock price a couple years after IPO and stayed low. By the time I arrived the company had switched to giving out RSUs which have much more straightforward tax treatment. But one of my coworkers had been there for years. He still had unexercised ISOs that had vested after the drop, at a strike price 2x the current value of the shares. He didn't get a tax bomb, but that past "compensation" was worth nothing.

And another. I used to work for a startup, and not a unicorn either. All of us early employees were offered ISOs. But 5 years in there was still no sign of an exit. Some employees left for new jobs, and had to choose between exercising their shares and abandoning them. Many had taken lower pay in trade for ISOs. I know folks who exercised 5 figures worth of shares because they still believed in the company. Years later the company still exists, and the valuation still looks fine and well above strike price, but there's no way the company ever exits and so the shares remain illiquid. The private market doesn't want them either.

Given these experiences, I believe ISOs are best valued like a lottery ticket - expected return $0.

As for a resource, if you are being offered or considering exercising large amounts of ISOs, look for an advisor who specializes in the tech industry. An accountant might be more help than an investment advisor.
chairon
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Re: Does anyone have experience with ISO”s?” (Incentive Stock Options)

Post by chairon »

I'm having this problem. My company went public and now my net worth is primarily in ISO options. I'm trying to come up with a reasonable diversification strategy while staying reasonably tax efficient. The company is stable enough I'm not worried about the risk of holding a large amount of options at any given time, but I can't find any good resources on modeling AMT. I've talked with a few accountants and they don't seem as well informed on the tax implications which is even more concerning.

The tricky part is my questions fall in the nexus between tax accounting and financial planning. It's been difficult to find anyone with expertise is both.
jarjarM
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Re: Does anyone have experience with ISO”s?” (Incentive Stock Options)

Post by jarjarM »

chairon wrote: Thu Oct 14, 2021 1:07 am I'm having this problem. My company went public and now my net worth is primarily in ISO options. I'm trying to come up with a reasonable diversification strategy while staying reasonably tax efficient. The company is stable enough I'm not worried about the risk of holding a large amount of options at any given time, but I can't find any good resources on modeling AMT. I've talked with a few accountants and they don't seem as well informed on the tax implications which is even more concerning.

The tricky part is my questions fall in the nexus between tax accounting and financial planning. It's been difficult to find anyone with expertise is both.
Welcome to the forum. It’s a bit surprising since the tax/financial planning with ISO is relatively straightforward once the goal is known. Keep in mind that AMT change enacted by the 2017 tax act shifted significantly more favorable for exercise and hold from a tax perspective than previously due to much higher limit for AMT phase out. If you are willing, you can post your situation here and many of us have dealt with ISOs enough to maybe point you in the right direction. Congrats on your liquidity event :beer
chairon
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Re: Does anyone have experience with ISO”s?” (Incentive Stock Options)

Post by chairon »

Thanks! I'll give it a shot.

The basic problem I need to solve is how I can exercise in a year without having to pay AMT. To give some basic numbers to work with suppose that I have income of ~500k (after selling some non-qualifying options, -19.5k worth of 401k, FSA deductions). I just married and my wife estimates her earnings at 200k (there's some uncertainty around this). By my reading it makes sense to file jointly so there's a $114,600 exemption. My two questions:

How much can I gain exercising ISOs (market - strike price) without hitting AMT?
If I exercise enough that I'll owe AMT, when do I have to pay it? If I exercise in January would I need to start paying the expected tax before years end to avoid penalties?

To be clear, I don't mind paying AMT, but everything I've read strongly advises against doing so without the advice of an accountant as the risk of penalties for mistakes is considerable. Further, the more I exercise the more risk of a mistake aside from the fact it leaves me in a more concentrated position with my company. I'm ordering the suggested book, but at this point I think it's worth getting professional advice if I could find it.

Any help is greatly appreciated.
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HanSolo
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Re: Does anyone have experience with ISO”s?” (Incentive Stock Options)

Post by HanSolo »

chairon wrote: Thu Oct 14, 2021 1:07 am The tricky part is my questions fall in the nexus between tax accounting and financial planning. It's been difficult to find anyone with expertise is both.
I'm sure that the larger and older tax preparation firms (which tend to be CPA firms that include a tax specialty) in Silicon Valley will have people who can help, especially if they have EA's (Enrolled Agents) on staff who were around and practicing during the dot-com bust. If one person can't do everything you're looking for, maybe they can help put together the team you need.
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chairon
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Re: Does anyone have experience with ISO”s?” (Incentive Stock Options)

Post by chairon »

HanSolo wrote: Sat Oct 16, 2021 3:20 am I'm sure that the larger and older tax preparation firms (which tend to be CPA firms that include a tax specialty) in Silicon Valley will have people who can help, especially if they have EA's (Enrolled Agents) on staff who were around and practicing during the dot-com bust. If one person can't do everything you're looking for, maybe they can help put together the team you need.
It's been surprisingly hard to find someone. I've gotten some referrals, but with all the delayed filing deadlines it seems like CPA firms seem to all under heavy load.
jarjarM
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Re: Does anyone have experience with ISO”s?” (Incentive Stock Options)

Post by jarjarM »

chairon wrote: Tue Oct 19, 2021 9:22 pm
HanSolo wrote: Sat Oct 16, 2021 3:20 am I'm sure that the larger and older tax preparation firms (which tend to be CPA firms that include a tax specialty) in Silicon Valley will have people who can help, especially if they have EA's (Enrolled Agents) on staff who were around and practicing during the dot-com bust. If one person can't do everything you're looking for, maybe they can help put together the team you need.
It's been surprisingly hard to find someone. I've gotten some referrals, but with all the delayed filing deadlines it seems like CPA firms seem to all under heavy load.
Lots of SPAC and IPO that overload their work. Are you in the valley? I could give you another referral if you are. Looking at some of your income #, it does look like IF you don't want to incur AMT, then ~$114k (FMV - strike price) is about how much you can exercise. Keep in mind that we're in a very different AMT regime compare to pre-2018 so it's not as bad as the horror stories you heard from the dot-com era.

Also, if you join the company early enough, QSBS could really reduce your tax impact as well. PM me if you need to discuss this more.
interwebopinion
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Re: Does anyone have experience with ISO”s?” (Incentive Stock Options)

Post by interwebopinion »

chairon wrote: Sat Oct 16, 2021 1:49 am Thanks! I'll give it a shot.

The basic problem I need to solve is how I can exercise in a year without having to pay AMT. To give some basic numbers to work with suppose that I have income of ~500k (after selling some non-qualifying options, -19.5k worth of 401k, FSA deductions). I just married and my wife estimates her earnings at 200k (there's some uncertainty around this). By my reading it makes sense to file jointly so there's a $114,600 exemption. My two questions:

How much can I gain exercising ISOs (market - strike price) without hitting AMT?
If I exercise enough that I'll owe AMT, when do I have to pay it? If I exercise in January would I need to start paying the expected tax before years end to avoid penalties?
Your accountant would recommend paying it as estimated taxes at the end of the quarter you exercise. There may be a safe harbor where current year tax withholding on income will match or exceed the prior year's taxes, in which case you have till next April. Again, best to get an accountant to confirm that.
chairon wrote: Sat Oct 16, 2021 1:49 am
To be clear, I don't mind paying AMT, but everything I've read strongly advises against doing so without the advice of an accountant as the risk of penalties for mistakes is considerable. Further, the more I exercise the more risk of a mistake aside from the fact it leaves me in a more concentrated position with my company. I'm ordering the suggested book, but at this point I think it's worth getting professional advice if I could find it.

Any help is greatly appreciated.
If you exercise, you're taking the bet that the stock will go up substantially from the current market value. Your AMT exposure exists because your grant price is below the current market value. Do you know what the current market value is? Is it substantially higher than your strike price? A safer strategy might be to just wait till the company reaches a liquidity point (IPO or acquisition) and then exercise and sell on the same day. No AMT headaches then.
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HanSolo
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Re: Does anyone have experience with ISO”s?” (Incentive Stock Options)

Post by HanSolo »

chairon wrote: Tue Oct 19, 2021 9:22 pm It's been surprisingly hard to find someone. I've gotten some referrals, but with all the delayed filing deadlines it seems like CPA firms seem to all under heavy load.
I sent you a referral via private message. Did you resolve your issue?
malloc wrote: Tue Oct 12, 2021 11:37 pm Does anyone have any experience with this situation, or know a good resource?
And how about you? Did you get what you needed?
VBIAX and chill (in taxable)
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