[tyre]

It’s fair because otherwise you could compensate people for zero tax. For example, you have a CEO that can either be paid:

1) $1m in cash

2) $1m in stock

3) an option grant to buy 1m shares at $0.000001. Each share has a FMV of $1.

Without AMT, you could always take (3) and they would get $1m of stock for $1. Tax free.

[kelnos]

So what? $1M in stock doesn't pay the rent. They'd still get taxed when they sell the shares.

[ctchocula]

Per Buy, Borrow, Die, they could take a margin loan using that $1M and use borrowed money (say $100K) to pay the rent. With enough accumulated shares, they wouldn't need to sell the shares in their lifetime. After they've passed away, they would pay off the loan and the stock gets a free step up to the appreciated cost basis.

[KptMarchewa]

How would you pay off the loan without selling at least the interest?

[konfusinomicon]

that's assuming the stock is actually transferable though. that day could never come

[travem]

Doesn't the option have to match the FMV at the time of issuance? E.g. Option 3 would be Option Grant at FMV of $1 with that constraint

[caseysoftware]

With (3), they'd be taxed on the gains when they sell. Not "tax free" at all.

The difference is that they wouldn't be taxed until the gains were realized not when they were imagined on paper.

[tyre]

The reason we have capital gains is to encourage investment. They're not investing $1 for 1m shares to build something better. They're getting $1m worth of something for $1, risk-free.

That gap between strike price and FMV is much more like compensation than it is an investment.

[buryat]

you can borrow against this asset and get basically a tax-free loan

[KptMarchewa]

Can you _actually_ borrow against completely illiquid, pre-IPO asset?

[konfusinomicon]

exactly this. tax time will come, hopefully. until then it's a tax on monopoly money.

[KptMarchewa]

But you can't sell those stocks/options/whatever until IPO. If you could I'd not mind.