Paying deferred tax on share options

[BTBL]

HI,
In 2000 I exercised and held share options in my company (quoted on NASDAQ)and chose to defer the tax for 7 years or until I sold the shares.

Unfortunately in the intervening years the share price has nosedived and the US dollar has plummeted.

Here I am 7 years later with a payment to make with my 2008 return. I have calculated that once I factor in the drop in share price and and in the dollar I won't make enough on the sale to pay the tax. So what I thought was a nestegg in 2000 turns out to cost me money!

Do I have any options here with revenue?
Am I obliged to use the exchange rate at that time rather than todays exchange rate when calculating my tax liability? The dollar has effectively halved in value over the years. If so is there such a thing as an "exchange rate loss" that can be leveraged??

Regarding the value of the shares themselves, if I sell them now is there a capital loss I can take advantage of? When I exercised the options the market value was lets say $50 but my grant price was $10. Todays price is $25. Is this a capital loss of $25 per share and how do I gain any value from this?

 

[WaterSprite]

HI,
In 2000 I exercised and held share options in my company (quoted on NASDAQ)and chose to defer the tax for 7 years or until I sold the shares.

Unfortunately in the intervening years the share price has nosedived and the US dollar has plummeted.

Here I am 7 years later with a payment to make with my 2008 return. I have calculated that once I factor in the drop in share price and and in the dollar I won't make enough on the sale to pay the tax. So what I thought was a nestegg in 2000 turns out to cost me money!

I hear ya - have done this myself! It hurts!

Do I have any options here with revenue?
Am I obliged to use the exchange rate at that time rather than todays exchange rate when calculating my tax liability? The dollar has effectively halved in value over the years. If so is there such a thing as an "exchange rate loss" that can be leveraged??

For income tax calcs, you have to use the exchange rate at the time you exercised the options. See below for CGT on exchange rate losses.

Regarding the value of the shares themselves, if I sell them now is there a capital loss I can take advantage of? When I exercised the options the market value was lets say $50 but my grant price was $10. Todays price is $25. Is this a capital loss of $25 per share and how do I gain any value from this?

Yes, you can take a capital loss for both the sale of the shares and the exchange rate loss. So, in the above example, your CGT loss on the share price itself is $25 BUT you need to factor in the exchange rate. So, in your example:

Option price (paid 7 years ago) - $10 = €8 (using random exchange figures here)
Market Value at Exercise - $50 = €40
Income tax liability - diff between €8 and €40 @ highest rate
CGT base for gain/loss = €40
Market value now - $25 = €16
Capital loss = €24 per share.

The losses you suffered due to the currency tanking is taken into account in the above example. I haven't factored indexation into the example but it should also apply, in which case you'll apply that to your €40 base price for CGT purposes.

Sprite

 

[BTBL]

Thanks a lot Sprite,
Appreciate the info.

So basically I factor in the share price drop and the exchange rate change in the capital loss on sale of shares only.
So there is no allowance on the BIK income tax incurred at time of exercise due to share price and exchange rate drop?
Must the capital loss on these shares only be offset against a capital gain? So if I have no assets to sell (at a profit!) then this capital loss is no use to me, right?
Thanks
BTBL

 

[WaterSprite]

Yep - right all round in what you say. The tax event was when you exercised your options and there is no allowance that I'm aware of that you can use to mitigate your income tax hit. And yes, the capital loss (both in share value and exchange) can only be used against a capital gain. You can carry forward a capital loss beyond this tax year so it's not necessarily of no use, just of no use right now if you don't have a capital gain.

I have been exactly where you are right now (although didn't avail of the 7-year deferral and paid the tax over the year I exercised and held my shares). Still have them by the way and the share price is a fraction of what it was when I exercised. It sucks.

Your only hope is to throw yourself at the mercy of the Revenue and tell them your story. I gather that's exactly what everybody did back in 2002/2003 and that's why they introduced the rule whereby employees have to pay share option tax within 30 days of exercising, so people wouldn't get used to the money and be faced with a nasty tax bill 7 years after exercise after the share price tanked. They (Revenue) have heard this story before and I doubt they would have sympathy at this stage, but it's worth a shot.

Sprite