Like many people who worked for many of the formerly high rising dot.com companies, Angela Hartley acquired stock options which today are practically worthless. And like an increasing number of people in her situation, Hartley has learned that her worthless stock may actually end up forcing her into bankruptcy thanks to tax laws designed to sock it to the rich.
The tax problem is created by the Alternative Minimum Tax. The AMT was created to lose tax “loopholes” that some wealthier people were using to drastically reduce their tax burden. One of the provisions of the AMT is that taxes have to be paid on incentive stock options — such as those Hartley received at her dot.com job — based on the value of the stock when the options are initially exercised rather than the value of the stock when the shares are actually sold.
When Hartley decided to exercise her stock options, the value on paper of her stocks was $900,000. If she had sold the stocks as soon as she could have, she would have been subject to high capital gains tax so, as many wealthy people do, she held on to the stock rather than sell it. Holding on to the stock for more than a year lowers the capital gains tax but triggers the AMT. The bottom line is after the year wait she would owe a $350,000 tax on her $900,000 stock sale.
The problem: by the time the year was up, her stock was in the tank. In fact, by the time she was actually ready to sell her stock, the value of the it won’t even pay half of her tax bill. Hartley now faces the prospect of selling her home and emptying her savings and retirement funds just to pay tax on paper profits. This for a single mother who had planned to quit her job to take care of her child. As Hartley told the San Jose Mercury Center, “THe irony is I will lose almost everything I have worked for due to the only stock I had that went up.”
Many people who enjoyed paper profits from sky high stock options find themselves in a similar situation as Hartley. Just one more reason to scrap the current income taxation system and start over.
Source:
Many investors running out of options. Mark Schwanhausser, Mercury Center, March 16, 2001.