Tax implications of IPO at my daughters workplace.

[Murdock75]

Don't know where else to reach out for info on my DD recently having the company she works for IPO and the tax implications of the vesting of 10,000 shares(amounts are rounded off for ease of discussion) 25% of the amount of shares earned. The information given her says that she needs to pay taxes on the value of these shares as ordinary income tax(46% federal and state in her case.) This doesn't seem reasonable and I can't figure out how this is possible that she has to come up with $46,0000 to pay these taxes. Is this the case with employees that have IPOs that make them millions of dollars? The information from the company isn't clear to me and even more opaque in my DD case. I would also guess that paying all these taxes doesn't affect the cost basis. Hoping that someone out there has some insight into this and can help explain this situation. Selling positions in her taxable account will result in more taxes(capital gains) and vesting of 6.25% of the remaining shares every three months with the same tax implications. Any ideas?

 

[JoeWras]

This doesn't seem reasonable and I can't figure out how this is possible that she has to come up with $46,0000 to pay these taxes. Is this the case with employees that have IPOs that make them millions of dollars?

Make millions, pay tens or hundreds of thousands.

I know, you are talking timing. Not enough information in your post. And to be honest, I'm not familiar with the machinations of IPO shares.

For RSUs, many companies will automatically sell shares the day of vesting in order to pay taxes. Sounds like she's going to have to sell some.

Different topic, but not completely: imagine you are on the "Price is Right" and you won the double-showcase worth $100k. Part of your winnings may be two snowmobiles and you live in Los Angeles. The tax man wants to be paid. What do you do? This is not fair, right?

 

[PlayinwithFIRE]

I think its also possible to "purchase" the options, wait a year or two, then sell to move them onto capital gains scale ? i could be wrong. This just adds the risk of what the price is a year or two from now.

pwf

 

[walkinwood]

Please bear in mind that I ER'd 16 years ago...

I've had options vested and didn't pay taxes on them until I sold the vested shares (exercised the option). Vesting only means that you have the right to exercise the options.

There are different kinds of options. One kind, the gains are treated as capital gains. The other as ordinary income. She'll have to figure out which kinds she has.

 

[Aerides]

This doesn't seem reasonable and I can't figure out how this is possible that she has to come up with $46,0000 to pay these taxes. Is this the case with employees that have IPOs that make them millions of dollars? The information from the company isn't clear to me and even more opaque in my DD case

Not enough info, but it sounds like these are RSU's, not option, based on the 25% thing.

How it worked for me: I was granted say 100 shares via RSU awards. Each year, 25% vested and became "mine" and were sold, and the proceeds/value, added to my paycheck and taxed accordingly.

It was a golden handcuff situation to keep me sticking around till they all vested.

IPO doesn't change this, it just potentially changes the value of her shares. She will pay the taxes out of the proceeds, one way or the other. She won't have to "come up" with $46k. She will owe whatever amount based on the vested income.

 

[JoeWras]

There are different kinds of options. One kind, the gains are treated as capital gains. The other as ordinary income. She'll have to figure out which kinds she has.

Exactly. That's why I'm saying there's not enough information.

These don't sound like NQSOs. You just let those ride until you sell them. ISOs are uncommon these days, and can be a huge trap. Long ago people at my Megacorp (kilocorp at the time) played tax games with ISOs and literally lost hundreds of thousands. No, they didn't lost the opportunity to vest and make money, they lost real cash.

What OP describes sounds similar to RSUs. They vest, you owe right away. EDIT: Aerides mentions this above, and it matches my experience. I'm guessing OP is talking about "coming up with" the $46k because perhaps OP's DD thinks she has to hold the shares. Nope, sell them and pay the tax if they are RSUs, and my company conveniently did it right there on the paycheck. Sounds like Aerides' did also.

 

[pb4uski]

Don't know where else to reach out for info on my DD recently having the company she works for IPO and the tax implications of the vesting of 10,000 shares(amounts are rounded off for ease of discussion) 25% of the amount of shares earned. The information given her says that she needs to pay taxes on the value of these shares as ordinary income tax(46% federal and state in her case.) This doesn't seem reasonable and I can't figure out how this is possible that she has to come up with $46,0000 to pay these taxes. Is this the case with employees that have IPOs that make them millions of dollars? The information from the company isn't clear to me and even more opaque in my DD case. I would also guess that paying all these taxes doesn't affect the cost basis. Hoping that someone out there has some insight into this and can help explain this situation. Selling positions in her taxable account will result in more taxes(capital gains) and vesting of 6.25% of the remaining shares every three months with the same tax implications. Any ideas?

It seems reasonable to me. If she received a $100,000 cash bonus then she would have to pay taxes on it. In this case, she vests in shares worth $100,000 and from that point forward can do with them what she wishes, right? It isn't much different. In this case, they gave her $100,000 of shares rather than $100,000 of cash.

If the taxes are burdensome, if she transfers the 10,000 shares to me then I will pay her tax bill for her.

If she doesn't have other resources, she could sell 4,600 of the 10,000 shares and use the proceeds to pay the taxes. I think that is typical in such instances but often there is a lock-up period (usually 90 days) where she can't sell so she is exposed to changes in prices during the lock-up period.

 

[Montecfo]

It really depends on what she owns and how she purchased it. Presumably it was in lieu of compensation and is vested. So it is taxed like other compensation.

If she paid for or was previously taxed on the equity interest then it could be capital gain upon sale.

How do others do it? Well if you have stock options then the tax treatment can be better but changes in accounting rules have rendered these less popular for the rank and file.

She will receive basis in whatever she owns equal to the value recognized.

She must recognize this is a first world problem!

 

[JoeWras]

Yeah, options and RSUs are typically taxed as income, not cap gains. Perhaps that's where the confusion of the initial post comes from.

It is a good problem to have.

And OP, if they are RSUs, when the vesting occurs, that's the basis for future value. So pay tax on that value as income, and then later whatever the stock does becomes a capital gain/loss situation if the stock is held.

NQSOs and ISOs are different, with ISOs potentially extremely complex. If DD is getting either of those, then it is different and we haven't talked about that yet.

 

[Murdock75]

It seems reasonable to me. If she received a $100,000 cash bonus then she would have to pay taxes on it. In this case, she vests in shares worth $100,000 and from that point forward can do with them what she wishes, right? It isn't much different. In this case, they gave her $100,000 of shares rather than $100,000 of cash.

If the taxes are burdensome, if she transfers the 10,000 shares to me then I will pay her tax bill for her.

If she doesn't have other resources, she could sell 4,600 of the 10,000 shares and use the proceeds to pay the taxes. I think that is typical in such instances but often there is a lock-up period (usually 90 days) where she can't sell so she is exposed to changes in prices during the lock-up period.

180 day lockup period.

 

[target2019]

It works in the way that the company describes. She receives a great rush of income each year, and the company puts out an FAQ to all employees about the tax treatment.
This happened to my son, and it was a game changer in his career.

 

[JoeWras]

I lot of company FAQs on tax treatment are pretty opaque and end up being confusing. They don't want to give tax advice. My Megacorp's discussion on taxes for stock incentives was basically "talk to your advisor."

 

[JoeWras]

180 day lockup period.

Right, this is where I lose the plot because newly minted companies, i.e. IPO, have a different set of issues. When I joined Megacorp, the old timers who remembered the IPO days of kilocorp had wild stories of tax problems due to the lock up, and especially due to the special treatment of ISOs.

I joined before all that fun. It is also why I didn't make $20M like some who sat at lunch table discussion we had that day.

 

[pb4uski]

180 day lockup period.

I wonder if she could just make sure that for 2026 her tax withholdings for federal and state meet or exceed the safe harbor amount, and then in early 2027, after she has owned the shares for a year + 1 day sell $46,000 worth (assuming that she doesnt expect them to decline in value and is comfortable holding them). If there is a gain then it would be a LTCG. I think the holding period starts when she receives the shares and not when the lock-up period ends.

Then she could use the proceeds from the sale to pay the tax bill when she files her 2026 tax return in early 2027. Since she paid or had withheld the safe harbor amount, she shouldn't be subject to underpayment penalties or interest as long as she pays the amount due on her return by Apr 15 2027.

Not sure it works but something to consider. At least, she has over a year to come up with the $46,000 for the taxes as long as she pays in the safe harbor amount. YMMV.

ETA: She could also cover off the taxes due on the remaining shares that vest in 2026 with the sale in early 2027.

 

[Kings over Queens]

180 day lockup period.

The lock up period is simply to prevent shareholders from selling shares immediately post IPO, the theory being to give the stock time to acclimate and stabilize in the market. It's not a tax thing.

 

[cathy63]

She definitely signed something when these shares/options were awarded. She needs to get a copy of that paperwork (or electronic doc if it was signed online) and figure out exactly what type of stock she has. Once you/she have that, then you can do more research to find out about the tax treatment. Until you know for sure whether she got RSUs or NQSOs or ISOs, you can't really figure out what tax is due.

She really needs to stay on top of this though. It's true that the initial lockup period is 180 days and she's stuck until at least then, but it's entirely possible that she's deemed an insider and will actually not be able to sell even after the 180 days expires. I worked for a company where every single employee was subject to insider trading restrictions for the first 3 years after the IPO. They would basically give us a 2-week window for trading in company stock that started about one week after the quarterly earnings report. If we were selling more than X shares we had to get advance permission. After 3 years they redefined "insider" and I was no longer locked out of the market for most of the year.

 

[cathy63]

I wonder if she could just make sure that for 2026 her tax withholdings for federal and state meet or exceed the safe harbor amount, and then in early 2027, after she has owned the shares for a year + 1 day sell $46,000 worth (assuming that she doesnt expect them to decline in value and is comfortable holding them). If there is a gain then it would be a LTCG. I think the holding period starts when she receives the shares and not when the lock-up period ends.

Then she could use the proceeds from the sale to pay the tax bill when she files her 2026 tax return in early 2027. Since she paid or had withheld the safe harbor amount, she shouldn't be subject to underpayment penalties or interest as long as she pays the amount due on her return by Apr 15 2027.

Not sure it works but something to consider. At least, she has over a year to come up with the $46,000 for the taxes as long as she pays in the safe harbor amount. YMMV.

ETA: She could also cover off the taxes due on the remaining shares that vest in 2026 with the sale in early 2027.

This will probably work, but she should also run some scenarios and figure out if she'll be subject to AMT which would mean she will owe more than $46K. That was something we always had to deal with when DH and I were getting employer stock. I know that the TCJA and other legislation over the past 10 years has significantly reduced the number of taxpayers hit by AMT, so it may be a non-issue now, but still worth checking on.

 

[JoeWras]

This will probably work, but she should also run some scenarios and figure out if she'll be subject to AMT

This AMT thing really factors in if they are listed as ISOs. ISOs get special AMT treatment. There are special ways to avoid or limit it, however, it can be dangerous. It is called the ISO tax trap. It was a big problem in the 2000 tech crash. Since then, I think Congress has given more grace in the AMT treatment with this issue. It just takes some studying to avoid falling into it. Like someone above said, read your stock incentive agreement.

BTW: that lunch discussion was interesting. I was new to the company, and people were complaining about paying $500k in fed taxes. My brain did the math and my jaw fell out. Then the discussion went to certain employees who joined via an acquisition with restrictive ISOs. These were the ones who hit the tax trap, with one fellow famously declaring bankruptcy and being a bit of a celebrity since he shared his story with a magazine like Newsweek. The story was provocatively titled like: "I was worth $2M and had to declare bankruptcy."

 

[pb4uski]

This will probably work, but she should also run some scenarios and figure out if she'll be subject to AMT which would mean she will owe more than $46K. That was something we always had to deal with when DH and I were getting employer stock. I know that the TCJA and other legislation over the past 10 years has significantly reduced the number of taxpayers hit by AMT, so it may be a non-issue now, but still worth checking on.

Agree. She can do a proforma 2026 tax return including this vesting along with other vestings scheduled for 2026 along with her other 2026 income and deductions to get an idea of what she will owe in April 2027 (including any AMT) and then figure out her safe harbor and how she can plan to raise the neede funds in early 2027.

 

[Route246]

Exactly. That's why I'm saying there's not enough information.

These don't sound like NQSOs. You just let those ride until you sell them. ISOs are uncommon these days, and can be a huge trap. Long ago people at my Megacorp (kilocorp at the time) played tax games with ISOs and literally lost hundreds of thousands. No, they didn't lost the opportunity to vest and make money, they lost real cash.

What OP describes sounds similar to RSUs. They vest, you owe right away. EDIT: Aerides mentions this above, and it matches my experience. I'm guessing OP is talking about "coming up with" the $46k because perhaps OP's DD thinks she has to hold the shares. Nope, sell them and pay the tax if they are RSUs, and my company conveniently did it right there on the paycheck. Sounds like Aerides' did also.

Agree. The IPO is not so relevant if there is no lockup on RSUs. IPO just means the shares are liquid and can be sold. Most companies can sell share to withhold the appropriate taxes.

 

[frank05]

The IRS views the value of the options when they vest as a benefit so they are taxed as income.

At my company they offered three options; cash enough of the vesting options to satisfy tax withholdings and the rest of the stock would be transferred to your account, sell all the vesting options withhold tax amount and give you the remaining cash and give you all the stock and you would have to give the company a check if you paycheck wouldn’t satisfy the withholding.

The value of the stock at vesting determines its purchase value if you choose to hold the stock. When you eventually sell the stock normal capital gain rules apply.

 

[Murdock75]

Thank you everyone for your comments. This was really helpful to know what questions to ask and figure an action plan to figure out the next steps for her. The short time I have been on this forum has been fabulous and I have really learned a lot from reading other posts.