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this post was submitted on 23 Feb 2024
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For the record it absolutely is taxed as such. As soon as it vests the IRS considers it income, whether they sell it for the cash or not.
Its a huge headache for startups sometimes. I had team members I wanted to compensate but just giving them the equity would have been an imediate big tax bill on a non-liquid, and speculative, asset. There's ways to massage it (like vesting) but he will absolutely have that taxed.
Oh, and I could be wrong but I think the share value is just taxed as ordinary income, not capital gains. Ie: if the award is denominated in $1 shares, which he sells for $1.10, the $0.10 gets capital gain rates (if he held it for a year) but the $1 is taxed just like a paycheck.
Is there an equivalent of the sell-to-cover withholding strategy for stocks that aren’t publicly tradable?
I don't see why you couldnt, but you'd need a buyer. Like if you had a funding round you might include in part of your use of proceeds a small buyback/ sell to cover like you're talking about. If the company was doing the sell to coverthats definitely easier cash wise than a bonus but not 0.
All these rules make total sense, they're just hard for really early companies. The lawyer calls alone on this stuff start to add up in a hurry and if you skip them you may have just screwed the people you want to help and muddied things for any future raise.