Carried Interest !

[pb4uski]

Most stock options given to ordinary employees are similar to the carried interest thing, except they are taxed at ordinary income.

A) You put very little if any money in

B) You don't lose if the company and options perform poorly

C) You gain if the company and options/stock do well

I wonder why stock option grant gains are not taxed like carried interest, at a cap gains rate?

And that is part of my point of the lack of symmetry between the way carried interest is treated as preferenced income and most other forms of variable compensation are ordinary income. While I agree there are powerful powers to leave the current taxation scheme in place, I would like to see it changed.

 

[Winemaker]

Most stock options given to ordinary employees are similar to the carried interest thing, except they are taxed at ordinary income.

A) You put very little if any money in

B) You don't lose if the company and options perform poorly

C) You gain if the company and options/stock do well

I wonder why stock option grant gains are not taxed like carried interest, at a cap gains rate?

My megacorp stock was very volatile and cyclical; when I was issued stock options I actually purchased the shares when they matured. I waited until the stock was at or close to the option price, and I exercised them. If they were exercised above the option price then it was taxed at regular income tax rates and SSI taves. Since I now owned the stock, when the price was right, I sold the shares, and paid the cap gains tax. I did this over 20 times, and was very tax efficient.

 

[Fermion]

My megacorp stock was very volatile and cyclical; when I was issued stock options I actually purchased the shares when they matured. I waited until the stock was at or close to the option price, and I exercised them. If they were exercised above the option price then it was taxed at regular income tax rates and SSI taves. Since I now owned the stock, when the price was right, I sold the shares, and paid the cap gains tax. I did this over 20 times, and was very tax efficient.

So essentially you were using your own money to gamble with the stock price of your company? I am not sure how this relates at all to what I posted, but cool story.

 

[MooreBonds]

Most stock options given to ordinary employees are similar to the carried interest thing, except they are taxed at ordinary income.

A) You put very little if any money in

B) You don't lose if the company and options perform poorly

C) You gain if the company and options/stock do well

I wonder why stock option grant gains are not taxed like carried interest, at a cap gains rate?

I don't know for sure, but weren't stock option grants considered an "expense" on the corporate income statement for tax purposes? (if they still aren't treated as an expense) If so, then whatever is considered an "expense" should be considered "income" to the other side of the transaction (i.e. the employee receiving the stock options) to keep it "revenue neutral".

 

[Independent]

It's hard for me to justify different tax treatment on the same activity (managing other people's money) depending on whether the manager is described as an insurance company investment officer or a hedge fund manager.

Of course, whenever the law gives different treatment to certain types of income than others, I expect we will see lawyers and accountants inventing creative ways of reclassifying that income from one bucket into the other. This happens in lots of ways other than just carried interest (though CI is a big deal for some extremely well compensated people).

I'd prefer that we just tax all income at the same rate. I don't think Congress is smart enough to say that the regular market incentives for working vs. investing are "wrong" and they need to be adjusted by differential tax rates.

 

[Winemaker]

I wonder why stock option grant gains are not taxed like carried interest, at a cap gains rate?

I made sure all my option profits were taxed at cap gains rate.

 

[Huston55]

Really feel kind of stupid that I had never heard of this before the past Sunday presidential debate. After googling and gaining some understanding of the concept/tax loophole I am simply amazed at how the tax code favors those in the upper brackets.

+1

I also researched CI after the second Pres Debate. The best link I found was Wikipedia (below), with this enlightening excerpt.

The origin of carried interest can be traced to the 16th century, when European ships were crossing to Asia and the Americas. The captain of the ship would take a 20% share of the profit from the carried goods, to pay for the transport and the risk of sailing over oceans.

https://en.m.wikipedia.org/wiki/Carried_interest

I'm in the "tax CI at ordinary income rates" camp. Note that there's a lot of recent history attempting to do just that.

 

[rrppve]

Carried Interest being taxed as Cap Gains is absurd. Just another tax preference given to a powerful lobbying group.
However, it really is minimal impact. It clearly is a sign of unfairness in the tax code, but changing the taxation to ordinary income will raise only a few dollars in revenue.
It's a great populist talking point during election cycles, but will never be dropped from the code unless there is comprehensive tax reform as too many political donations come from the tiny percentage of taxpayers that benefit from it.
Just sayin'


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