You are correct to realize that the potential income from stock is
riskier than cash payments to you. It is very desirable to be paid in
United States dollars so that you do not have to worry about currency
fluctuations affecting your income. Having the stock listed in United
States will also benefit you by providing a transaction in United
States dollars. Your stock should also be easier to trade.
However, I would advise understanding how you would sell the stock if
the listing in United States does not occur as soon as you hope it
will. I would also find out how you would be taking ownership of the
stock: will you be receiving stock certificates or will someone be
keeping it on deposit for you, and how will you trade it in the
applicable circumstance? Also, will the company require you to hold
the stock for a particularly length of time before you can sell it?
I am confused by your use of the term "strike price" with respect to a
stock. The term is typically applied to an option, which you state
you are not receiving. Perhaps you mean the price the stock to fund
the additional capital infusion will be issued at? It would be
unusual for an issuance of stock to result in a rapid, significant
increase in the stock price. Typically, sales of stock depress the
share price, at least in the short run.
Regardless, assuming the stock does appreciate and you sell it, you
will have a tax liability. If you have held the stock for less than
12 months, then gains on it will be treated at the same tax rate as
your regular income. Therefore, the tax liability associated with the
stock sales will be the same as that for the cash you receive.
In the event that you hold the stock for more than 12 months, gains on
it will be taxed as long-term capital gains at rates which are lower
than those for ordinary income.
Once you have paid the capital gains tax, there is no remaining tax
liability on the proceeds of your sales.
I am not aware of any opportunity for you to use the overseas location
of the company to reduce your tax liability.
I have included some links regarding capital gains and the various
rates that apply to assist you in understanding the implications of
stock sales.
Sincerely,
Wonko
Sources:
"Tax Rate on Capital Gains" Business Owner's Toolkit
www.toolkit.cch.com/text/P07_3002.asp
"Capital Gains and Losses" Internal Revenue Service (February 19,
2004) http://www.irs.gov/newsroom/article/0,,id=106799,00.html
"Publication 544, Sales and Other Dispositions of Assets" Internal
Revenue Service http://www.irs.gov/pub/irs-pdf/p544.pdf
"Publication 550, Investment Income and Expenses" Internal Revenue
Service http://www.irs.gov/pub/irs-pdf/p550.pdf |
Request for Answer Clarification by
tbone949-ga
on
14 Nov 2004 15:05 PST
Thank you for your timely and insightful answer. A couple of small clarifications:
1) What is the method of stock sale that you recommend to minimize my
risk and delay
2) I agree that I'm using "strike price" incorrectly. What I meant to
say is that the stock will be issued to me at the price at the
offering. Specifically, 25% of my annual salary will be payable at
the beginning of any 6 month period in stock - meaning it is being
paid up front since I will be able to sell future "salary" ahead of
time. Are you saying that, if owned for less than 12 months, my
"salary-as-stock" will be taxable as regular income? Including any
gain over the $0.15? And if I wait 12 months, the $0.15 is still taxed
as income and any gain is taxed at 15% only?
3) What is the long term capital gains tax rate? From my research I
found it to be Federal 15% but I'm not sure about the state tax rate
(California).
4) Finally, based on your analysis, can you confirm the following
numbers/scenario for me that I derived from a capital gains calculator
based on a joint filing household income of $210K - see the calculator
at:
http://www.moneychimp.com/features/capgain.htm
Proceeds from stock sale: $50,000
Federal Tax Bracket: 33%
Selling within one year:
State Tax Rate: 9% (California)
Federal Tax Rate: 33% (?)
Total Tax due: $21K
Net sale: $29K
Selling after one year:
State Tax Rate: 0% (California)
Federal Tax Rate: 15%
Total Tax due: $7.5K
Net sale: $42.5K
Advantage of waiting 12 months: 46.55%
Many thanks,
T-Bone
|
Clarification of Answer by
wonko-ga
on
15 Nov 2004 12:28 PST
1) Keeping the stock with a broker that can sell it on the exchange it
is traded on in street name is the easiest way to sell it quickly. If
it is not traded as an American Depository Receipt, you may have
issues with very high commissions and currency exchange associate with
foreign exchange. You may also have difficulty finding a broker who
can trade there if it is an obscure exchange.
2) I think I was insufficiently clear about how to value your gain. I
apologize. Your cost basis in the stock will actually be $0 for tax
purposes. The stock's per-share value is only relevant to your
employer to calculate how many shares to give you to match an
equivalent amount of salary at the moment of issuance. From the
perspective of the IRS, however, you will have a gain as long as the
stock is worth anything when you sell it, even if it has declined in
value from when it was originally given to you.
If the stock is held for less than 12 months, any proceeds from a sale
of stock are taxed at your regular income rate. If you hold the stock
for more than 12 months, then any proceeds from a sale of stock are
taxed at the long-term capital gains rate only.
3) "California's long-term capital gains tax rate is the same as it is
for ordinary income: 9.3%" "Breaking Even: Short-Term Vs. Long-Term
Capital Gains" by Rande Spiegelman, Schwab Center for Investment
Research (April 8, 2004)
http://www.schwab.com/public/schwab/market_insight/investing_strategies/stocks/breaking_even_shortterm_vs_longterm_capital_gains.html?cmsid=P-415752&lvl1=market_insight&lvl2=investing_strategies&refid=P-462133
4) With a purchase price of zero, a sale price of $50,000, a federal
tax rate of 33%, and a state tax rate of 9.3%, I obtained an Advantage
of Waiting of 31.20%. While you will certainly pay less tax, however,
if you absolutely have to have the money or the stock is volatile, you
will want to consider selling immediately and/or hedging your position
using an option strategy. As many learned during the crash, holding
shares to achieve a better tax rate is not a good strategy if the
stock is falling faster than the tax liability is. Making sure that
your employer is really giving you the option of selling the shares
immediately without any holding requirement that all is important to
confirm.
Sincerely,
Wonko
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