4

Let's say I currently have the right to exercise some employee stock options (ISO) at a certain strike price. I have add these options for more than a year.
I read that the AMT tax applies on the difference between the value of the stock at the moment at which I bought it and the value of the stock at exercise. I assume the later is derived from the 409a valuation.

Here are the 3 questions I have:
1. Is the AMT tax based on the last 409a valuation at the time of exercise?
2. My company is growing fast and its fair market value should be growing just as fast. Does it make sense for me to exercise my options sooner in order to pay lower AMT taxes. If I wait, a new 409a valuation could be issued and I would have to pay more taxes. I realize that if I decide to sell those options after an IPO or after the company is acquired, I will have to pay long-term capital gain taxes on these but I would be able to pay the taxes from the gains as opposed to now.
3. When it's time to file my taxes, will have to ask my company about its fair market value to calculate my AMT? Does my company need to file a 409a regularly that I would use to calculate the AMT?

3

Is the AMT tax based on the last 409a valuation at the time of exercise?

No, the AMT tax is based on the FMV (Fair Market Value) on the day of the exercise. If you exercise today and tomorrow a new 409a valuation comes doubling the value - you can't say that because you exercised a day before you only gained half. You should talk to a professional tax adviser (EA/CPA licensed in your State), and check with your company about valuation, before making a decision.

Does it make sense for me to exercise my options sooner in order to pay lower AMT taxes.

This is definitely a factor in making a decision. If you believe in the company and think it will only go up - then definitely. But on the other hand, you may end up paying high AMT now and then the value will go down leaving you with capital loss (much less tax benefit than the AMT taxes paid...). You also have to remember that the tax you pay now is out of your pocket, the gains are on paper only. A lot of people lost a lot of money like that during the .NET bubble. So be careful.

When it's time to file my taxes, will have to ask my company about its fair market value to calculate my AMT?

You don't have to but you definitely should.

  • Thanks for the answers but if the FMV is not based on the 409a, what is based on? I don't think the company would hire an auditor to figure out the FMV every time someone exercises their options. – Youcha Apr 27 '14 at 1:56
  • @Youcha 409a valuation is required for strike prices, i.e.: for when the options are granted. The options are generally granted close to the time of the valuation. However, exercising the options can be at arbitrary times without any 409a valuation made by the company any time near. If the company cannot help you - you'll have to get your own valuation. – littleadv Apr 27 '14 at 2:41
  • 1
    A company I was at valued the pre-public stock based on the last sale. So if you have options for $1, and there is a sale at $4, you would use $4. If the "true" value is really $7, but the last sale happened at $4, you would still use $4. – Alex B Apr 27 '14 at 18:14
  • @AlexB this will work if there are relatively frequent rounds. But if there were no additional sales in the last year or so, I wouldn't be surprised if the IRS challenge this position, especially if there was a sale at a significantly higher value closely after the transaction. – littleadv Apr 27 '14 at 21:51
  • I agree. Even with infrequent sales, the system I described was the one used. YMMV. – Alex B Apr 27 '14 at 21:56

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .