How does AMT/state taxes work for stock options in California?
Does this technically mean that she has to pay AMT on $400,000? Yes. Well, not exactly 400,000. She paid $1 per share, so 390,000. And if so, is %28 the AMT for this sum? (0.28 * $400,000 = $112,000)?   Or does she have to include her salary on top of that before   calculating AMT? (Suppose in the fake example that her salary is   $100,000 after 401k). All her income is included in calculating the AMT, minus the AMT exemption amount. The difference between the regular calculated tax and the calculated AMT is then added to the regular tax. Note that some deductions allowed for the regular calculation are not allowed for the AMT calculation. How does California state tax come into play for this? California has its own AMT rules, and in California any stock option exercise is subject to AMT, unless you sell the stock in the same year. Here's a nice and easy to understand write up on the issue from the FTB. When would she have to pay the taxes for this huge AMT? Tax is due when income is received (i.e.: when you exercise the options). However, most people don't actually pay the tax then, but rather discover the huge tax liability when they prepare to submit their tax return on April 15th. To avoid that, I'd suggest trying to estimate the tax and adjust your withholding using form W4 so that by the end of the year you have enough withheld. Suppose in the worst case, the company goes completely under. Does she   get her massive amounts of tax back? Or if it's tax credit, where can   I find more info on this? That would be capital loss, and only up to $3K a year of capital loss can be deducted from the general income. So it will continue offsetting other capital gains or being deducted $3K a year until it all clears out. Is there any way to avoid this tax? (Can she file an 83b election?) You asked and answered. Yes, filing 83(b) election is the way to go to avoid this situation. This should be done within 30 days of the grant, and submitted to the IRS, and a copy attached to the tax return of the grant year. However, if you're considering exercise - that ship has likely sailed a long time ago. Any advice for Little Susie on how she can even afford to pay that   much tax on something she can't even sell anytime soon? Don't exercise the options? Should she   take out a loan? (e.g. I've heard that in the extreme case, you can   find angel investors who are willing to pay all your taxes/strike   price, but want 50% of your equity? I've also heard that you can sell   your illiquid shares on SecondMarket?) Is she likely to get audited by IRS for pulling something like this? You can take a loan secured by shares you own, there's nothing illegal in it. If you transfer your shares - the IRS only cares about the taxes being paid, however that may be illegal depending on the terms and the conditions of the grant. You'll need to talk to a lawyer about your situation. I suggest talking to a licensed tax adviser (EA/CPA licensed in your State) about the specifics concerning your situation.
I don't know the legal framework for RSUs, so I'm not sure what is mandatory and what is chosen by the company issuing them. I recently reviewed one companies offering and it basically looked like a flat purchase of stock on the VEST date. So even if I got a zillion shares for $1 GRANTED to me, if it was 100 shares that vested at $100 on the 1st, then I would owe tax on the market value on the day of vest. Further, the company would withhold 25% of the VEST for federal taxes and 10% for state taxes, if I lived in a state with income tax. The withholding rate was flat, regardless of what my actual tax rate was. Capital gains on the change from the market value on the VEST date was calculated as short-term or long-term based on the time since the VEST date. So if my 100 shares went up to $120, I would pay the $20 difference as short term or long term based on how long I had owned them since the VEST. That said, I don't know if this is universal. Your HR folks should be able to help answer at least some of these questions, though I know their favorite response when they don't know is that you should consult a tax professional. Good luck. In the question you cited, I assumed immediate exercise, that is why you understood that I was talking about 30 days after grant. I actually mentioned that assumption in the answer. Sec. 83(b) doesn't apply to options, because options are not assets per se. It only applies to restricted stocks. So the 30 days start counting from the time you get the restricted stock, which is when you early-exercise. As to the AMT, the ISO spread will be considered AMT income in the year of the exercise, if you file the 83(b). For NQSO it is ordinary income. That's the whole point of the election. You can find more detailed explanation on this website. If you take the profit or loss next year, it counts on next year's taxes.  There's no profit or loss until that happens. I agree with the other posters that you will need to seek the advice of a tax attorney specializing in corporate taxation. Here is an idea to investigate: Could you sell the company, and thereby turn the profits that are taxed as ordinary income into a long-term capital gain (taxed at 15%, plus state income tax, if any)? You can determine the value of a profitable business using discounted cash flow analysis, even if you expect that the revenue stream will dry up due to product obsolescence or expiry of licensing agreements.  To avoid the capital gains taxes (especially if you live in a high-tax state like California), you could also transfer the stock to a Charitable Remainder Trust. The CRT then sells the shares to the third-party acquirer, invests the proceeds and pays you annual distributions (similar to an annuity). The flip side of a sale is that now the acquiring party will be stuck with the taxes payable on your company's profits (while being forced to amortize the purchase price over multiple years -- 15, if I recall correctly), which will factor into the valuation. However, it is likely that the acquirer has better ways to mitigate the tax impact (e.g. the acquirer is a company currently operating at a loss, and therefore can cancel out the tax liabilities from your company's profits).  One final caveat: Don't let the tax tail wag the business dog. In other words, focus your energies on extracting the maximum value from your company, rather than trying to find convoluted tax saving strategies. You might find that making an extra dollar in profits is easier than saving fifty cents in taxes. There's an odd anomaly that often occurs with shares acquired through company plans via ESPP or option purchase. The general situation is that the share value above strike price or grant price may become ordinary income, but a sale below the price at day the shares are valued is a capital loss.  e.g. in an ESPP offering, I have a $10 purchase price, but at the end of the offering, the shares are valued at $100. Unless I hold the shares for an additional year, the sale price contains ordinary W2 income. So, if I see the shares falling and sell for $50, I have a tax bill for $90 of W2 income, but a $50 capital loss. Tax is due on $90 (and for 1K shares, $90,000 which can be a $30K hit) but that $50K loss can only be applied to cap gains, or $3K/yr of income.  In the dotcom bubble, there were many people who had million dollar tax bills and the value of the money netted from the sale couldn't even cover the taxes. And $1M in losses would take 300 years at $3K/yr.  The above is one reason the lockup date expiration is why shares get sold. And one can probably profit on the bigger companies stock.  Edit - see Yelp down 3% following expiration of 180 day IPO lock-up period, for similar situation. My understanding was that if they cash out they only have to pay capital gains tax on it, which is lower than income tax for their bracket. You also have to think about tax on dividends from these stock options, which is only 15%, which is paltry to regular incometax rate that the rich pay on their salaries. According to Wikipedia:  Congress passed the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), which included some of the cuts Bush requested and which he signed into law on May 28, 2003. Under the new law, qualified dividends are taxed at the same rate as long-term capital gains, which is 15 percent for most individual taxpayers  Anyways, SOMETHING needs to be done. I don't see a tag for United States, so I'm having to assume this is US taxes.  It doesn't matter what app you use, IRS trades are all calculated the same. First, you have to report each trade on a 8949 and from that the totals go into a schedule D.  Short term trades are stocks that you've kept exactly one year or less, long term trades are for 1 year + 1 day or more.  Trades where you sold a stock for a loss, then bought that stock back again under 30 days don't get to count as a loss.  This only affects realized capital gains and losses, you don't count fees. First, take all of your short term gains then offset them by all of your short term losses.  Do the same for long term gains and losses.  Short and long term gains are taxed at different rates.  You can deduct losses from short term to your long term and vice versa.  Then you can deduct the total losses up to $3000 (household, $1500 married, filing separately) per year on your regular income taxes or other dividend taxes.  If you have over $3000 in losses, then you need to carry that over to subsequent years. Edited per Dave's comments: thanks Dave You're talking about NQO - non-qualified stock options. Even assuming the whole scheme is going to work, the way NQO are taxed is that the difference between the fair market value and the strike price is considered income to you and is taxed as salary. You'll save nothing, and will add a huge headache and additional costs of IPO and SEC regulations. Yes (most likely). If you are exchanging investments for cash, you will have to pay tax on that - disregarding capital losses, capital loss carryovers, AGI thresholds, and other special rules (which there is no indication of in your question). You will have to calculate the gain on Schedule D, and report that as income on your 1040. This is the case whether you buy different or same stocks. "Of course, but that's not relevant to my example. Let me clarify: say you hold a highly-appreciated $10M position in AAPL and you have good reason to believe the next iPhone is going to be a flop, causing the stock to decline 20%. You can sell now to avoid the (probable) decline, but by doing so you will be left with, let's say, $6.67M after paying $3.33M of state and federal LTCG taxes on the appreciation ($9M of the $10M, because you bought a long time ago).  However, by simply doing nothing and ""eating"" the 20% decline, you'll end up with $8M instead of $6.67M.  Many economists would criticize the tax in this example, as it has led to the investor rationally suffering a $2M loss, instead of reallocating all $10M of his/her capital to a more promising enterprise. Furthermore, if/when many investors act that way, they can create inefficiency in the equity markets (prices not declining by as much as they should to reflect a firm's reduced prospects)." "Very interesting question. While searching i also found that some precious metal ETFs (including IAU) gains are taxed at 28% because IRS considers it ""collectible"", rather than the usual long term 15% for stocks and stock holding ETFs. As for capital gain tax you have to pay now my guess it's because of the following statement in the IAU prospectus (page 34): When the trust sells gold, for example   to pay expenses, a Shareholder will   recognize gain or loss ...." "As ApplePie discusses, ""tax bracket"" without any modifiers refers to a single jurisdiction's marginal tax rate.  In your case, this is either your California's ""tax bracket"" or your Federal ""tax bracket"" (not including marginal Social Security and Medicare taxes).  But if someone says ""combined state and federal tax bracket"", they probably mean the combination of your state and federal income tax brackets (again, lot including sales taxes, business and occupational taxes, social security taxes, and medicare taxes).  The math to combine the state and federal marginal tax rates is a bit tricky, because most people can deduct either their state and local income taxes, or their state and local general sales taxes when computing their income for federal income tax purposes.  (The federal ""alternative minimum tax"" restricts this deduction for some people.) For a single person earning $ 100,000 of salaries and wages in California, whose state income taxes are close to their standard deduction, the calculations for the combined marginal income tax rate look something like this: As mentioned above, this understates the tax bite on marginal ""earned income"".  To find the true marginal rate, we need to add in Social Security taxes, Medicare taxes, sales taxes, and business & occupation taxes.  The Social Security and Medicare taxes are sometimes called ""self employment taxes"".  This math omits unemployment insurance and workers' compensation insurance, because those taxes are typically capped well below $ 100,000 per year of income.  This math also omits B & O taxes, because this question is California specific. If an employer wishes to increase an employee's pay by $ 1,076.50, the first $ 76.50 will go to the employer's share of Social Security and Medicare taxes.  The remaining $ 1,000.00 will be subject to the combined marginal income tax rate discussed above, plus will have $ 76.50 go to the employee's share of Social Security and Medicare taxes.  The employee might buy some extra things with some of their extra money, and pay sales tax on them. In 2016, a 9 % sales tax rate was common in California's largest cities. The IRS estimated that (for a single person with no dependents making $ 100,000 per year who did not buy a boat, RV, motor vehicle, or major home construction), about 9 % of their marginal gross income was subject to sales tax." The rules are complex. See How to Deduct IRA Losses, at Smart Money.  You must liquidate the entire account (bad) and the loss is subject to the amount exceeding 2% of your AGI. If you are subject to AMT, you may lose any or all of that remaining amount. "A little terminology: Grant: you get a ""gift"" with strings attached. ""Grant"" refers to the plan (legal contract) under which you get the stock options. Vesting: these are the strings attached to the grant. As long as you're employed by the company, your options will vest every quarter, proportionally. You'll become an owner of 4687 or 4688 options every quarter. Each such vest event means you'd be getting an opportunity to buy the corresponding amount of stocks at the strike price (and not the current market price which may be higher). Buying is called exercising. Exercising a nonqualified option is a taxable event, and you'll be taxed on the value of the ""gift"" you got. The value is determined by the difference between the strike price (the price at which you have the option to buy the stock) and the actual fair market value of the stock at the time of vest (based on valuations). Options that are vested are yours (depending on the grant contract, read it carefully, leaving the company may lead to forfeiture). Options that are not vested will disappear once you leave the company. Exercised options become stocks, and are yours. Qualified vs Nonqualifed - refers to the tax treatment. Nonqualified options don't have any special treatment, qualified do. 3.02M stocks issued refers to the value of the options. Consider the total valuation of the company being $302M. With $302M value and 3.02M stocks issued, each stock is worth ~$100. Now, in a year, a new investor comes in, and another 3.02M stocks are issued (if, for example, the new investor wants a 50% stake). In this case, there will be 6.04M stocks issued, for 302M value - each stock is worth $50 now. That is called dilution. Your grant is in nominal options, so in case of dilution, the value of your options will go down. Additional points: If the company is not yet public, selling the stocks may be difficult, and you may own pieces of paper that no-one else wants to buy. You will still pay taxes based on the valuations and you may end up paying for these pieces of paper out of your own pocket. In California, it is illegal to not pay salary to regular employees. Unless you're a senior executive of the company (which I doubt), you should be paid at least $9/hour per the CA minimum wages law." Is the remaining amount tax free? As in, if the amount shown (which I can sell) on etrade is $5000 then if I sell the entire shares will my bank account be increased by $5000? The stocks they sell are withholding.  So let's say you had $7000 of stock and they sold $2000 for taxes.  That leaves you with $5000.  But the actual taxes paid might be more or less than $2000.  They go in the same bucket as the rest of your withholding.  If too much is withheld, you get a refund.  Too little and you owe them.  Way too little and you have to pay penalties.   At the end of the year, you will show $7000 as income and $2000 as withheld for taxes from that transaction.  You may also have a capital gain if the stock increases in price.  They do not generally withhold on stock sales, as they don't necessarily know what was your gain and what was your loss.  You usually have to handle that yourself.   The main point that I wanted to make is that the sale is not tax free.  It's just that you already had tax withheld.  It may or may not be enough.