Stock Option Tax Amnesty

In my last post, I explained what is going on with the tax amnesty granted to former JDS Uniphase employees who ran afoul of the rules for taxing stock options. I continue to read articles that are sharply critical of the government, but don’t accurately portray what happened.

The main point that people I speak to about this situation don’t believe even when I explain it is that taxes are being charged on income never received. It is possible for employees with stock option plans to put $10,000 into their plans, later take $10,000 out of their plans, and then be expected to declare $500,000 in income on their taxes. See here for a full explanation.

I disagree with those who say that these are high-tech high rollers who deserve what they got. I worked with people who were caught by these tax rules for smaller amounts. My colleagues were not high rollers or even particularly savvy with their money. Like most people they did their best to understand the benefits offered by their employer, and somehow managed to mess it up.

I do agree that the government is wrong to give special treatment to this small group of people. What should be done is to change the tax rules to allow stock option gains to be written off against capital losses (for everyone).

If no stock options were involved, there would be no problem. Suppose that you put $10,000 into stock A, and it goes up to $500,000. You then sell that stock and use the proceeds to buy stock B. The value of your stock B drops down to $10,000, and you sell. On your taxes you will declare a $490,000 gain on stock A, and a $490,000 loss on stock B. The gain and loss offset, and you don’t declare any extra income. Why shouldn’t it be the same with stock options?

Now I know that the government employs some smart tax people, and it is possible that they know of ways to abuse the tax system if the change I’m suggesting is made. If this is true, then they should find some other way to prevent the abuses without pointlessly ruining the financial lives of people who have no intention of abusing our tax system.