Author Topic: Stock Options at Large Company  (Read 2370 times)

Xlar

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Stock Options at Large Company
« on: May 30, 2017, 01:05:57 PM »
I have a few questions around stock options and the best way to diversify out of them.

First and most importantly, when you sell stock options this shows up as regular income, correct? So you pay state and federal income taxes not capital gains?

If one has a large amount (6 or 7 figures) of these stock options what is the best way to diversify out of them? If you sell them all in one year and then buy an index fund you get hammered by income taxes... My current thoughts to diversify are:

  • Sell over time. Do an amount each year that keeps the taxes in a reasonable bracket. Downside: Might take too long and that particular company might have issues decreasing the value of the option.
  • If you want to do charitable contributions during retirement you could open a charitable fund (http://jlcollinsnh.com/2012/02/08/how-to-give-like-a-billionaire/). Then you could sell the option, donate the money to the charity, then you don't have to pay income tax. Then once you FIRE you can make your charitable donations from the fund instead of from your regular investments. Obviously, this assumes that you plan on making charitable contributions during FIRE.
  • Is there an option 3 that I haven't considered?

MDM

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Re: Stock Options at Large Company
« Reply #1 on: May 30, 2017, 06:16:06 PM »
First and most importantly, when you sell [buy shares using your] stock options this shows up as regular income, correct? So you pay state and federal income taxes not capital gains?

If one has a large amount (6 or 7 figures) of these stock options what is the best way to diversify out of them? If you [exercise the option to buy] them all in one year...you get hammered by income taxes[, regardless of whether you hold them or] sell and then buy an index fund.

It may well be what you meant, but see edits above to ensure you understand what triggers the large tax bill.

Telecaster

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Re: Stock Options at Large Company
« Reply #2 on: May 30, 2017, 06:26:57 PM »
Are you talking about options or restricted stock units? 

Car Jack

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Re: Stock Options at Large Company
« Reply #3 on: May 31, 2017, 06:52:49 AM »
With either stock options or restricted stock options, I sell them the microsecond that they're vested.  I've worked for a company where I got a boatload of options that vested after 1 year and I had a 2 day window before the blackout period closed down.  Sold everything and used the money to pay off my mortgage, buy my wife a new car and buy myself a nice HDTV (this was early 2000's).  A friend at work said "no, the price is going to go way up" and he kept the options.  The price took a nose dive and to this day hasn't come above water, so he got nothing.

Sell it.....take the tax hit.  Even if you had to pay 50% of the gains in tax, isn't 50% of something better than holding for cap gains and getting a full "nothing"?

runewell

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Re: Stock Options at Large Company
« Reply #4 on: May 31, 2017, 09:37:36 AM »

Sell it.....take the tax hit.  Even if you had to pay 50% of the gains in tax, isn't 50% of something better than holding for cap gains and getting a full "nothing"?

It's not as good as ... a lot more money

ysette9

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Re: Stock Options at Large Company
« Reply #5 on: May 31, 2017, 12:29:52 PM »
Our philosophy is to sell those suckers just as quickly as possible (holding a year and a day if appropriate to get long-term capital gains) and get the money diversified. My risk tolerance just doesn't let me sleep well at night with assets concentrated in one company/stock, especially if you are relying on that same company for your paycheck. I don't buy individual stocks for the same reason.

chasesfish

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Re: Stock Options at Large Company
« Reply #6 on: May 31, 2017, 07:50:52 PM »
So there's two types of options, one of which have a tax benefit to exercising and holding shares for a year.  I think the IRS now requires withholding the day you exercise to prevent large bills people can't pay if the price declines

Assuming they aren't the tax efficient type options, I'd sell and diversify once they vest unless you're already well past financial independence and want to gamble on single stock risk.   (Most billionaires were millionaires who then took concentrated stock positions)

I get restricted stock from a large, slow growth company.  Every year I get issued more than what vests, so I sell immediately and diversify.  I already have plenty of restricted stock units and don't expect the company to out perform the index.  If they do, I still win based on the four year vesting period.

Do you continue to be issued options?  If you want to keep some or have a concentrated position, that's fine, just figure out what % of your net worth you're comfortable with and don't waiver on going above that amount.  Personally I'd only do that after being financially independent with my "other" money.


MustacheAndaHalf

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Re: Stock Options at Large Company
« Reply #7 on: May 31, 2017, 08:57:41 PM »
You might already have been taxed on the value of the options - take a look at your W-2 and ask your company benefits department.  If that's the case, then when you sell the options you'd pay tax on the growth.

If you're close to 10-11 months of growth and it's significant, you might wait past the 1 year mark to get long-term capital gains rates (in the 25% tax bracket, people only pay 15% on long-term capital gains of 366 days or more).  But at some point you need to avoid having an investment portfolio consisting of only 1 company.

Xlar

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Re: Stock Options at Large Company
« Reply #8 on: June 01, 2017, 11:57:16 AM »
First and most importantly, when you sell [buy shares using your] stock options this shows up as regular income, correct? So you pay state and federal income taxes not capital gains?

If one has a large amount (6 or 7 figures) of these stock options what is the best way to diversify out of them? If you [exercise the option to buy] them all in one year...you get hammered by income taxes[, regardless of whether you hold them or] sell and then buy an index fund.

It may well be what you meant, but see edits above to ensure you understand what triggers the large tax bill.

That's very helpful, I had not completely understood that.

Are you talking about options or restricted stock units? 

Pretty sure they're options (Have to admit that I'm asking for a friend. Wish I had that much available, hahaha). They have a strike price and then you get the delta between the strike price and the current value?

Xlar

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Re: Stock Options at Large Company
« Reply #9 on: June 01, 2017, 12:01:42 PM »
With either stock options or restricted stock options, I sell them the microsecond that they're vested.  I've worked for a company where I got a boatload of options that vested after 1 year and I had a 2 day window before the blackout period closed down.  Sold everything and used the money to pay off my mortgage, buy my wife a new car and buy myself a nice HDTV (this was early 2000's).  A friend at work said "no, the price is going to go way up" and he kept the options.  The price took a nose dive and to this day hasn't come above water, so he got nothing.

Sell it.....take the tax hit.  Even if you had to pay 50% of the gains in tax, isn't 50% of something better than holding for cap gains and getting a full "nothing"?

It's not as good as ... a lot more money
Our philosophy is to sell those suckers just as quickly as possible (holding a year and a day if appropriate to get long-term capital gains) and get the money diversified. My risk tolerance just doesn't let me sleep well at night with assets concentrated in one company/stock, especially if you are relying on that same company for your paycheck. I don't buy individual stocks for the same reason.

Sell it.....take the tax hit.  Even if you had to pay 50% of the gains in tax, isn't 50% of something better than holding for cap gains and getting a full "nothing"?

That's what I'll push for. Seems silly to hold on to them.

Looks like the difference for married filing jointly would be (based on 2016 federal brackets) 28% for up to 233,330 to a possible 39.6% if they sold everything in one shot. That's only a 10% difference and it could easily change by that value before you get around to selling them in small chunks while trying to stay under the 28% bracket... (Pretty sure that's the bracket they are trying to stay under)

Also, they live in a state with fixed income tax so that won't change when they sell more.

Xlar

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Re: Stock Options at Large Company
« Reply #10 on: June 01, 2017, 12:05:05 PM »
So there's two types of options, one of which have a tax benefit to exercising and holding shares for a year.  I think the IRS now requires withholding the day you exercise to prevent large bills people can't pay if the price declines

Assuming they aren't the tax efficient type options, I'd sell and diversify once they vest unless you're already well past financial independence and want to gamble on single stock risk.   (Most billionaires were millionaires who then took concentrated stock positions)

I get restricted stock from a large, slow growth company.  Every year I get issued more than what vests, so I sell immediately and diversify.  I already have plenty of restricted stock units and don't expect the company to out perform the index.  If they do, I still win based on the four year vesting period.

Do you continue to be issued options?  If you want to keep some or have a concentrated position, that's fine, just figure out what % of your net worth you're comfortable with and don't waiver on going above that amount.  Personally I'd only do that after being financially independent with my "other" money.

Withholding the day off makes sense from the IRS perspective. So my option 2 completely help to avoid the tax implications?

I believe my friend will not continue to get the options. They have the ones they have and that is it.

You might already have been taxed on the value of the options - take a look at your W-2 and ask your company benefits department.  If that's the case, then when you sell the options you'd pay tax on the growth.

If you're close to 10-11 months of growth and it's significant, you might wait past the 1 year mark to get long-term capital gains rates (in the 25% tax bracket, people only pay 15% on long-term capital gains of 366 days or more).  But at some point you need to avoid having an investment portfolio consisting of only 1 company.

That's an interesting thought. I'll discuss it with my friend and see if they can find out. That would make a huge difference as they would all then be long-term capital gains!