There is no tax _difference_. The only question is when you pay your taxes (on options above n 100,000); it's merely a cash flow thing. The TechCrunch arthor misunderstands that somehow there are tax savings (there are none;
the strike price doesn't change over the course of the option plan).
> Yet, months after employees started work, Uber breached its Employment Agreements by systematically imposing a different exercisability schedule than contained in the Employment Agreements which, according to Uber, disqualified most of the options from ISO treatment while presumably affording Uber with millions of dollars of tax deductions.
So this wasn't the TechCrunch author misunderstanding tax law. It is straight quoted from the lawsuit.
Let's say an employee has personal savings $100,000 and is granted $100,000 in stock.
If they have to pay 20% tax on what they exercise, then they can only exercise ~$83,000 of their options. The remaining $17,000 worth will need to be exercised at a later date.
Let's say the company then gets sold 3 years later and the employee's stock is worth twice what it was when they were offered it. The employee's additional stock now is exercised immediately and the difference of $17k between the strike price and the sale price is taxable as income.
Had they been able to exercise that $17k worth of stock 6 months after joining—which they would have had the money to do if they hadn't had to immediately pay tax on the amount they exercised—then that $17k would have been taxed as long-term capital gains, at a lower rate.
So you don't consider ISOs triggering the alternative minimum tax (AMT) on exercise as a tax difference? Or that a company can deduct the spread when NSOs are exercised? These are non-trivial tax differences.
The tax difference is that the long-term capital gains rate is 15% and marginal income tax rates are in the 30-40% range.
With ISOs, if you have a qualifying disposition, you get long-term capital gains on the entire spread between strike price and sell price. With NSOs you have to to pay regular income tax at the spread that exists at time of purchase: http://www.investinganswers.com/financial-dictionary/options...
This can be huge if shares are exercised post-IPO. For example, imagine you have an option with a strike price of $10. Your company goes public at $110 and stays roughly there for a year. With an ISO, if you exercise the option when the company goes public and sell it after a year for $110 you owe $15 of tax. With an NSO you are paying $30-40 of tax at time of purchase. This means you pay 25% more tax on the NSO.
Yes, there are AMT issues ignored in this analysis, but these work out to net-neutral once you account for AMT credits. This also ignores other benefits of ISOs such as not needing to come up with the funds for tax in order to exercise and secure your share. If you do owe AMT, Uncle Sam only charges 3-4% interest: https://proconnect.intuit.com/proseries/articles/federal-irs...
The TechCrunch author may have a misunderstanding but you do as well. Assets which always trigger AMT can result in very different tax outcomes than assets which _may_ trigger AMT.
Another article asserted that _Uber_ sees tax savings from the options over 100,000. I'll find it if I can (I'm currently on a hotspot on Caltrain). You're implying that the savings should be to the person, which is a different story.
Pretty much everyone prefers the six month cliff.