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A friend o'mine is telling me that some investors who managed to make some serious dough on the bull market are now facing the prospect of having to pay taxes on price that is no longer there. She stated that some employees offered shares by their tech companies did not sell before the drop (under "Wise" advise) and now they have to pay taxes on the previous value of the stock, owing the IRS some hundreds of thousands on money they never had.
This is my first posting, so I appologize if this is a foolish question. It just seems that the level of risk I am planning to take just doubled by this prospect.

go Fools!
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now facing the prospect of having to pay taxes on price that is no longer there

Anyone who had profits last year and who held onto tech stocks over the past year is in the same boat.

now they have to pay taxes on the previous value of the stock, owing the IRS some hundreds of thousands on money they never had.

Your post wasn't entirely clear to me, but this sentence above certainly doesn't make sense. If your friend's employees owe taxes on stock profits, then they certainly did have the money at some point in time. You didn't say if this was exercising options or shares of stock, but it takes a transaction that yields a profit to owe a tax; tax is not paid on a 'value' of a stock.

Dan
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LMM,

A friend o'mine is telling me that some investors who managed to make some serious dough on the bull market are now facing the prospect of having to pay taxes on price that is no longer there. She stated that some employees offered shares by their tech companies did not sell before the drop (under "Wise" advise) and now they have to pay taxes on the previous value of the stock, owing the IRS some hundreds of thousands on money they never had.

Yes, your friend is correct. This has gotten fairly wide coverage in the press over the past few months. Here's an example I found via www.deja.com:

Mr. Chou used incentive stock options to buy about 100,000 Cisco shares last year, paying 5 to 10 cents per share. At the time, Cisco stock was trading between $60 and $70 a share. The difference between the price he paid and what the shares were worth - a total of about $6.9 million - is taxable to him as profit, even though he never sold the shares.

Mr. Chou could sell his shares now, but it would not solve his problem. Cisco closed Thursday at $17.98, which means that his entire stake is worth about $1.8 million. To pay his state and federal tax bill, he needs another $700,000.


This is my first posting, so I appologize if this is a foolish question. It just seems that the level of risk I am planning to take just doubled by this prospect.

Not sure what your question is -- if you're asking if this can happen, it can, and has. Are you thinking of starting work with a high-tech firm, and concerned about the risk associated with any options you may be offered?

Phooley in Phoenix
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"Not sure what your question is -- if you're asking if this can happen, it can, and has. Are you thinking of starting work with a high-tech firm, and concerned about the risk associated with any options you may be offered?"

No. I just want a piece of the fiberoptic industry. I want to buy stock on JDSU. Photons are and will always be faster than electrons. I want to buy, hold and stir clear from options and most importantly the IRS. It looks like I have nothing to worry about. Thanks.
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When you say you have nothing to worry about, I worry. You can lose all of your money. Be careful..........
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goodeeds writes (in part):

Your post wasn't entirely clear to me, but this sentence above certainly doesn't make sense. If your friend's employees owe taxes on stock profits, then they certainly did have the money at some point in time. You didn't say if this was exercising options or shares of stock, but it takes a transaction that yields a profit to owe a tax; tax is not paid on a 'value' of a stock.

I reply:

That's not entirely accurate. When discounted stock options are used as compensation, the "bargain element" is usually taxed, either as ordinary income (in the case of non-qualified options) or under AMT rules (for ISO options). In either case, it's the paper profit that's used to calculate income. That profit is also added to the stock's basis (or its AMT basis, in the case of ISO options), but realizing a loss in 2001 by selling the fallen shares won't reduce tax liability for 2000. The only way to avoid this trap is to realize the loss in 2000. --Bob
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This was not due to the risk associated with options. This was simply the result of losing an investment on a stock. Had he sold the stock at the value he was taxed on then bought another stock with the proceeds, then lost a large amount, no one would blame it on the options taxation. He had stock worth the value of what was taxable at the time of the transaction, and decided to take the risk of holding the stock. I realize that many people forgot that there is RISK involved with stocks, especially tech stocks.
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